In an economic recovery of 1% to 2% growth, the year-to-year increase in domestic loans rose to 7% in 2016, but growth in time deposits this year remained near zero. In past credit cycles, a 10% growth in domestic loans created, as much as, 20% growth in time deposits and strong demand for brokered CDs (see chart below).
Given tax cuts and increased domestic spending on roads, ports, etc., real GDP growth is projected to rise to 2.2% in 2017 and 3% in 2018. Bank domestic loan growth, therefore, increases to 15% or more. Yields on the 10-year T-Note are expected to rise to 3% or higher by 2018.
Given, the Federal Reserve policy of low Fed Funds rates and a build in liquidity, MMDAs and savings accounts increased to $7.8 trillion by September 2016, while time deposits remained at $1.6 trillion. The massive buildup in liquid savings financed the 7% growth in domestic loans to $8.9 trillion in 2016. A pickup in loan growth by 2018 to 15% or more indicates strong growth in time deposits.
In past credit cycles, accelerating growth in time deposits occurred late in the cycle, such as 1995, 2000, and 2005-2006, requiring domestic loan growth of 10% (see chart below).
A rise in interest rates to 2% on short-term funds, coupled with an increase in yields on 10-year T-Notes to 3% or more, favors an expansion in time deposits over MMDAs. Given the above scenario, time deposit growth accelerates to 20% or more by 2018, creating a strong demand for brokered CDs in the next few years.