DETROIT – CD savers take note: It’s quite possible rates on certificates of deposit may have scraped bottom.

Nobody’s going to want to run out and grab a CD at the current low rates. But the trend is telling.

An upbeat sign: The average yield on a 5-year CD edged up to 2.59 percent as of late July, according to Bankrate.com, which tracks interest rates and banking trends. That’s up from 2.49 percent a month earlier on June 25, the day the Federal Reserve last cut short-term interest rates.

Another good thing: The yield on 1-year CDs stopped going lower in recent weeks. The average yield on a 1-year CD has been 1.04 percent for three weeks, Bankrate.com says.

“We’re starting to see the beginning of what will be a very long rebound,” said Greg McBride, senior financial analyst for Bankrate.com in North Palm Beach, Fla.

Why are long-term CD rates going up, even slightly, when the Federal Reserve is using all its might to keep interest rates low?

The bond market, not the Fed, drives the long-term interest rates that influence CDs and mortgages.

By contrast, money market accounts more closely track the short-term rates set by the Fed. The money market rate has continued falling modestly. It averaged 0.52 percent July 30 vs. 0.61 percent June 25.

Bond yields are moving higher because we’re seeing more hope on the horizon.

The Commerce Department reported Thursday that the economy grew at a stronger-than-expected pace from April through June. The gross domestic product, a measure of the U.S. output of goods and services, grew at an annual rate of 2.4 percent in the second quarter – above the 1.4 percent for each of the previous two quarters.

Signs of a stronger economy give bond traders more reason to worry about inflation ahead. So good economic news has tended to push up stock prices and to drive down prices for U.S. Treasury bonds. Yields, which move in the opposite direction of bond prices, have been climbing up.

Yields for 10-year U.S. Treasuries closed at nearly 4.43 percent Thursday. That’s up sharply from 3.07 percent in mid-June.

“Those yields are reflecting the expectation that economically we’re turning the corner,” McBride said.

Most CD watchers are not forecasting a dramatic swing upward in rates in the next few months.

One factor that could hold down rates: the slow growth in the labor market. A struggling jobs picture could push bond yields down in the future.

Even so, savers shouldn’t lock up too much money now in longer-term CDs. Most market watchers recommend staying in short-term CDs, say six-month CDs, to take advantage of higher rates in the months ahead.

“I would keep it fairly short. CD rates are going to be rising along with the Treasury yields,” said Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis.

Or some savers might invest directly in U.S. Treasuries because CD yields should move up less quickly than Treasury bond yields.

See www.publicdebt.treas.gov for Treasury information.

So when could we expect to see a 5-year CD hit 5 percent?

It won’t be next week. But it might be sooner than you’d think. Remember, the average yield on a 5-year CD was 4 percent a year ago and 4.69 percent two years ago.

So Sohn says it’s possible, as the economy continues to recover, that you could see a 5-percent CD within the next year or so.

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(c) 2003, Detroit Free Press.

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AP-NY-08-04-03 1325EDT