Fixed-income options worth a look

Like a tuft of green grass that pops up in the bleak, brown yard after a long winter, fixed-income interest rates are showing signs of life. While borrowers fret about rising loan rates, folks who like to stash cash in certificates of deposit are enjoying the prospect of heftier income on their bank statements.

In a rising interest-rate environment, the name of the game is to stay flexible -- find the highest rate for the shortest term so you're not stuck when rates climb. Be sure you can move your investment to a higher rate if rates spike at your bank.

Current national averages, according to Bankrate.com, are 1.5 percent for a six-month CD and 2.10 percent for one-year. That compares with 0.92 percent and 1.04 percent, respectively, about a year ago. Of course, you needn't settle for average if you're lucky enough to have a bank in your neighborhood that's paying higher, or if you're willing to use a bank that's out of your area. Bankrate's highest yields page shows several institutions paying 2 percent or better on six-month CDs, and about a half-dozen offering 2.75 percent or better on one-year CDs.

Certified financial planner Ben Tobias of Tobias Financial Advisors in Plantation, Fla., isn't a fan of CDs at this time.

"I think we're going to be looking at significantly higher interest rates a year or two from now. We'll see a 25-basis-point increase every Fed meeting for the next six months. If you're locked into an interest rate, you're losing opportunity costs you might have had in a money market account."

CDs with a kick
But if CDs are a staple in your portfolio, one way to minimize potential losses is to purchase a bump-up or step-up CD, which allows you to move to a higher interest rate one time during the term. Be aware that some institutions pay a lower rate on bump-up CDs than they do on ones with comparable maturities that don't have the option.

Watermark Credit Union in Seattle, Wash., offers the bump-up option on all CDs with 12 months or less maturity.

"We're not trying to catch people with an option that they'll pay for later," says marketing director Jerry Sparrow. "They don't have to opt for this and give up a portion of the rate. They get the same great rate."

The best way to wait for the day when better rates prevail may be by opening a high-interest money market account. Just about everyone's seen the ads for ING Direct, always offering one of the top rates in this category. And there are other players, such as Virtual Bank, which is paying 2.15 percent.

"We're opening thousands of accounts each month. Customers are looking for a convenient, easy-to-use, FDIC-insured account with a great rate," says Larry Fein, Virtual Bank marketing director.

"The question we hear is, 'How can you offer a rate like that when my local bank is offering a half percent?' We're an Internet bank and we don't have the overhead of a traditional bank, so we can offer the higher rate."