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Want More Yield Than a Money Fund? Try Bank CDs

Beating money-market yields isn't hard if you're willing to call a bank - and tie up your money.

Rising interest rates could boost yields on bank certificates of deposit, as on other fixed-income investments, predicts Robert Heady, who publishes the Bank Rate Monitor, a newsletter that tracks CDs and bank money-market accounts. But the increase will be slow.

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"This is no rocket ride. This is like a snail on a modest incline," Mr. Heady says.

Certificates of deposit are like a bond that's tailor-made for you. You can choose how long to commit your money - from a few months to several years. The longer the "maturity," or due date, of the CD, the higher interest you'll earn.

But if you yearn for the yield, don't forget one big drawback. Unlike a money-market fund, you'll pay a penalty to get out of a CD early.

Shop around to get the best yield: At Emigrant Savings Bank in New York, for example, a 13-month CD (minimum: $1,000) pays 5.80 percent. At Southern Pacific Thrift and Loan in California, a 12-month CD, $5,000 minimum, earns 6.34 percent.

Heady reckons that if Fed policymakers don't boost rates in their meeting today, they will before too long. What that suggests to him and other analysts is that rates will continue edging higher.

Since March, when the Fed boosted rates by 0.25 percentage point, yields on short-term CDs have moved up about 0.13 percentage points, he says. Long-term yields are up around 0.17 percentage points.

If the Fed boosts rates again today, by the same amount, the same scenario will occur, he says.

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The bottom line, Heady says: If you assume rates are going to go higher, buy short-term CDs of three or six months duration, but not more than a year. Then you can take advantage of higher rates down the road.

Some experts suggest you "ladder" your CD money: You might buy CDs with durations up to two years, but plan for a chunk of money to come due every three months.

There is a clue to what bankers are thinking, says Heady: Long-term rates have inched up ahead of short-term rates. This suggests that bankers see short-term rates moving higher.

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