CD rates hold well despite Fed cut
By Laura Bruce • Bankrate.com

There's no doubt that we're in a falling-rate environment, but CDs haven't fallen nearly as much as might have been expected when the Federal Reserve's Open Market Committee cut the federal funds rate 50 basis points in September.

While some CD rates, especially those of longer maturities, compete with Treasuries of similar duration, there are other dynamics in the mix when financial institutions price CDs. Competition for customers and a bank's funding needs are among the factors that affect the yields offered.

A survey of average annual yields shows no big cuts. Institutions are, so far, simply paring yields.

Average yields as surveyed by Bankrate.com

Credit crunch brings banks back to basics
Herb Hopwood, Certified Financial Planner and president of Hopwood Financial Services in Great Falls, Va., says the credit crunch is contributing to the scenario.

"The banks need to find another source of capital; they can't go to the commercial paper markets. One way they can raise some money is through the CD market. It's getting back to the old blocking and tackling that banks were supposed to do, which is that you raise money through deposits, you lend it out and you play the spread. They had kind of gotten away from that and now they've found religion."

Hopwood's firm monitors brokered CDs that are available to consumers through institutions such as Fidelity and Charles Schwab. He notes that in mid-September both firms were offering two-year CDs yielding approximately 4.95 percent. They now stand at 4.74 percent. Again, there's been a definite drop, but not as severe as it could have been.

MetLife Bank N.A., is an institution that consistently competes in the high-yield CD and money market account marketplace without trying to be too aggressive. The bank offers a tiered system; the more money you deposit, the higher the yield.

"When the Fed dropped 50 basis points, we took our money market rate down about 25 basis points, which is half the difference," says Gina Renaldo, vice president for marketing and product development of MetLife Bank. "We were at 4.4 percent prior to that. If you look at a 12-month CD, based on balance, our rate today would range between 3.75 percent and 4.7 percent, so that's a pretty big range. Some of the most aggressive competitors are still in the low 5 percent range, but you'll find some of the most recognized names, some of the more traditional banks, offering far below what we're offering."

Looking ahead
The big question now is whether yields will continue to hold up if the Fed cuts rates again, as expected, at the Oct. 31 meeting.

Michael Prebenda, senior vice president at HSBC Direct, says the crush for cash resulting from the subprime issue is disrupting the typical pricing that CDs would follow, and he expects that to continue.

"I'm not surprised (that average yields have held fairly steady) because the base is so large. You'd have to see some pretty big movements to see the average rates fall, but high-yield rates are reflecting the liquidity needs of banks.

"I think the short-term pressures for liquidity will remain and any expectation of some sort of uniform response to a change in the Fed rates is not likely to occur. Rates will, again, likely reflect the liquidity needs of the business. Pricing at this point in time does not reflect the fundamentals of business; it's just a reaction to short-term cash needs."

That could bode well, even if there is a rate cut Oct. 31, for consumers who are hoping to lock-in high yields for a specific period of time based on their investment goals.

A word to the wise: Don't expect this situation to last indefinitely. Rates aren't likely to go any higher but there are still plenty of institutions paying 4.5 percent and above on CDs ranging from three months to five years. Check Bankrate's high-yield database for CDs and money markets.