Certificates of deposit get about as much respect as the sweat pants in your closet – comfortable but not very sexy.
Now, these familiar savings instruments offered by banks, credit unions and brokerages have a little more glitter, particularly if you’re looking for a short-term place to park some cash.
Yields on short-term CDs are rising because the Federal Reserve has raised the rate that banks can charge on overnight loans from 1 percent to 5 percent over the past two years.
At the same time, rates on long-term certificates barely have budged because bond investors are betting that inflation won’t be a threat.
This scenario has set up intriguing decisions for people pondering how much yield they should strive for and how long to tie up their money.
“There’s currently a clear bias for shorter maturities,” said Greg McBride, senior financial analyst at Bankrate.com, a rate-tracking firm in Florida.
He predicts that will continue for several more months but expects long-term CD rates to push up eventually.
“I think we’ll see a window of opportunity ahead for investors to lock up long-term money (at higher yields),” he said.
Higher yields are good news for people like Ray Mariani, 73, a retiree in Peoria, Ariz.
“I have been a CD investor since I was 35 years old,” Mariani said, adding that he still misses the old double-digit yields of the late 1970s and early 1980s. “I am sure we will never see those rates again.”
Since the Fed started boosting interest rates in June 2004, 12-month CDs have increased from 1.5 percent on average to roughly 3.7 percent, according to Bankrate.com. During the same span, five-year certificates have gained just half a point, to 4.1 percent. These changes reflect the reality that long-term interest rates, including those paid on CDs, are influenced less by Fed actions and more by strength in the economy, inflationary expectations and so on.
It’s part of the same pattern that has seen yields surge on money-market mutual funds and stagnate on long-term bonds and bond funds.
CDs also are looking more competitive against fixed-rate annuities, despite the tax-sheltered advantages enjoyed by the latter products.
In general, though, CDs are capital-preserving instruments from which nobody’s going to strike it rich.
If you’re lucky, yields over the long haul merely will keep you a step ahead of the corrosive impacts of inflation and taxes.
At least payouts have risen to the point where these instruments no longer are money losers.
Not that everyone cares, of course. CDs are so conservative that some people pay scant attention to them, even in a rising-rate environment.
5-year CD rates
Here are the top rates offered in Colorado and nationally for five-year certificates of deposit. Rates as of May 4.
Colorado
Colorado State Bank and Trust: 5.4
303-861-2111
Horizon Banks: 5.38
303-485-5444
Compass Bank: 5.2
800-266-7277
National Transportation Alliance Bank, Ogden, Utah: 5.39
800-837-4136
E*Trade Bank, Arlington, Va.: 5.35
800-387-2331
M&T Bank, Oakfield, N.Y.: 5.35
800-528-6532
Source: Bankrate Inc.
