CDs show promise as stocks stagger
With rates hitting their highest levels in five years, certificates of deposit may be worth locking in now.
Bank certificates of deposit (CDs) are suddenly among the hottest investments in town in financial terms - along with money-market accounts - thanks to this year's increases in interest rates, not to mention the stock-market doldrums.
"For many fixed-income investors, this has been a particularly good time," with bank CD rates "at their highest levels in the past five years," says Greg McBride, a financial analyst with Bankrate.com, a financial Web site that carries bank CD rates, as well as other interest-rate linked statistics, such as mortgage rates.
Mr. McBride's advice: If you are planning to buy a CD anytime in the next year or so, "now is the time to lock in."
Rates on long-term CDs (of 10-years duration or longer) are inching downward a tad, although they are still high compared to the past few years. Shorter-term CDs, such as one-year instruments, have been holding their own, McBride says.
The average yield on five-year CDs, for example, was around 6.20 when rates peaked in early June, McBride says. As of mid-September they were running around 6.06 percent.
One-year CDs were averaging about 5.66 percent in early June. Now they are just about identical, at 5.67 percent.
The driving force behind high rates, most economists agree, stems from the interest-rate hikes by the Federal Reserve Board. Loan demand is also high, prodding banks into competing for fresh cash.
The Fed has boosted interest rates six times since June 1999, in a series of moves designed to slow the US economy and curb inflation. With inflation now showing no signs of breaking back out - and the economy running on fewer cylinders - the Fed is not expected to boost rates when policymakers meet tomorrow.
A minority of economists, in fact, believe the Fed may cut rates later this year or early next year, if the economy slows too dramatically.
But even if that were to occur, CD rates would not be dramatically affected, McBride argues. The reason, he says, is that CD rates tend to be "anticipatory" by nature. That is, CD rates, which are correlated to US Treasury issues, would start to inch downward well in advance of an actual rate decrease.
Thus, the bottom line, says McBride, is that there will be time in the months ahead to get into a good CD if you are not there. Buy now, if you have free cash, he says. But if you are sitting on a CD that is poised to roll over sometime in the next few months, don't consider cashing out to chase minute yield differentials; rather, he says, just let the instrument naturally roll over.
Top-yielding CDs can be found at www.bankrate.com. All the banks listed, McBride says, are federally insured. Thus, a CD buyer can feel comfortable, even if the financial institution they would like to buy from is located in a different part of the US.
Finally, two key alternatives to bank CDs are also looking attractive for fixed-term investors, says Peter Crane, managing editor of imoneynet, a financial Web site (www.imoneynet.com). Both money-market funds and bond funds are posting steady returns, Mr. Crane says, again, reflecting the higher interest rate climate in the US.
"The average money fund is now yielding 6 percent," not far from the rate of around 6.15 percent offered by some banks for one-year CDs, says Crane. "We haven't seen [money-market] rates like this since back in 1991," he says.
Some bond funds are offering somewhat similar, or higher, yields. But bond funds always carry market risk, says Crane. CDs are locked in, with penalties for early withdrawals. That's why, he adds, it makes sense to look towards a plain old money-market fund, if you are shopping for fixed-income type returns in a very liquid financial product.
(c) Copyright 2000. The Christian Science Publishing Society