April 7 , 2000 -- Pssst ... interested in a really hot money tip? Buy a CD.

Certificates of deposit, hot?

That's right. While Wall Street's wild ride continues to send day traders running for the antacids, rates on the humble CD have slowly risen to their highest level since May '95.

The Bankrate.com National Index average yield for a 1-year CD is currently a sizzling 5.32 percent, up from 4.38 percent one year ago.

The same index shows the 5-year CD at 6.00 percent, surging up from 4.61 percent just 12 months ago.

But that's not all!

Go to the Bankrate's 100 Highest Yields section and you can find 1-year yields of 7 percent and 5-year yields exceeding 7.3 percent. To find the best deal in your backyard, check out our state-by-state listings.

There's even more good news.

"CD yields have increased steadily in the past 12 months, but the rate of inflation hasn't," says Bankrate.com financial analyst Greg McBride. "This translates to a higher real rate of return to CD investors over the past year."

Antidote to market nausea
The CD revival is not as surprising as it may seem, according to Keith Leggett, senior economist with the American Bankers Association. After all, even the most avid investor cringes when the stock market takes one of its heart-pounding, stomach-dropping roller coaster dives.

"As the stock market becomes a lot more volatile, investors and savers are going to look for sources of liquidity, and CDs are an ideal spot to park your money," says Leggett. "They offer a return, they're liquid, and they're especially attractive to the small investor because your principal is safe."

If the roller coaster rides of the Dow and the Nasdaq weren't enough to scare you off stocks, there is the added uncertainty of the presidential race to consider.

"Election years always have a degree of volatility because there's this uncertainty about what is going to continue as far as the course of policy; is there going to be any kind of radical change in policy? Especially when you don't have an incumbent running."

Those fleeing to the sanctuary of CDs will find good news indeed.

"Rates are very attractive right now and savers may want to take advantage of it," Leggett says. "The rates reflect the fact that banks are trying to attract funds in part to meet loan demands. When you look at how strong the economy has been performing, at least over the last several years, the growth of loan demand has outpaced the growth of core deposits, so banks need to find ways of attracting new sources of funding. And there's a lot of competition out there, and that's another factor that's being reflected in these prices."

Bottom line: It's hip (and nicely profitable) to own CDs again, and their new high rates are just the latest evidence of their revival.

The comeback kids of savings
Like Rodney Dangerfield, certificates of deposit are used to getting no respect. Until this revival the hottest investment vehicle of the '80s had become the eight-track player of the financial world, a ho-hum underachiever favored only by the most risk-averse mattress-stuffers among us.

But steadily CDs mounted their comeback. Now like a healthy but routine breakfast cereal you've grown tired of, CDs are back with "new and improved", "more choices" and "try me now" written brightly all over the box.

Instead of little marshmallows in the mix, you get "stock market CDs" and the like. The day is approaching when CDs will come with frequent flier freebies or washing machines. And people who sell CDs believe many buyers who abandoned them for bigger and better returns might soon be coming back because CDs still have their reliability, safety and earning power along with their new wrinkles.

The reasons for the CD's luster loss were fairly obvious: The stock market's roll, inflation and unemployment were down, and the explosion of new technologies and spiffy financial products made speculating as easy as brushing your teeth.

In fact, according to "Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances" by the Federal Reserve Board, more families now hold mutual funds (16.5 percent) than CDs (15.3 percent), and have for the past couple of years.

"CDs are not viewed as an investment vehicle the way they were a decade ago," says Leggett. "You go back 25 years ago, households held close to 30 percent of their wealth in bank deposits. Today, it's down to 13 percent, including CDs."

As times have changed, so have saving habits. Ten years ago, according to the survey, 20.4 percent of those questioned were primarily saving for retirement and 37.5 for liquidity. Today, those figures are reversed: 34.7 percent say they're tending their nest egg while 23.3 percent are seeking liquidity. Chalk that up to the great awakening.

As baby boomers jog into middle age, retirement suddenly doesn't look so far away. With kids -- and elderly parents -- to tend to, the boomers jumped from CDs to higher-yielding mutual funds.

"Right now, about 50 percent of all households are holding some form of stock wealth, so that's becoming more prevalent as a means of saving," says Leggett. "The returns being generated on the stock market compared to CDs have made it more attractive. It may also be that households are changing their risk tolerances; they may be willing to assume more risk."

And where there is a motivated buyer, there is ample opportunity for the savvy seller.

Building a sexier CD
CDs aren't sitting lost and lonely like wallflowers at a dance any more. Thomas Coan, president of Federally Insured Savings Network, one of the oldest CD brokerage houses, says the frumpy CD has taken on a sexy new look of late.

"We've never seen so many issuers of negotiable CDs," he says. "We started the Web site four years ago with just jumbo CDs."

Today, CD brokerages feature a sometimes-baffling array of products: fixed-rate jumbo, fixed-rate callable, bonus-rate callable, fixed-rate/fixed-term and compounding growth, to name just a few. Strong stock market performance has also prompted the introduction of a stock market CD, with interest based upon the gain in the S&P 500. It's a way for the timid to play the market without risking their initial investment, which is insured by the Federal Deposit Insurance Corporation.

"This has the best of both worlds," says Coan. "You'll never lose your original principal and there's a lot of potential for upside if the stocks go up. A couple of the stock market CDs we've done have been unlimited in the respect that there is no averaging. They're what we call point-to-point, so if the S&P is up 300 percent, you're getting 300 percent."

Hmmmmm, those stock market CDs look tempting, you say.

"Frankly," says Coan, "they're interesting, but they're not a great seller. There are two kinds of people -- the equity people and the CD people. The equity people don't look at CDs very much and the CD people don't think about equity very much." Coan chuckles at some of the new products. "We once had a CD that was keyed to the stock market going down," he recalls. "I'm not sure we actually sold one."

He's equally skeptical of recent online CD auctions. "I think that's kind of phony. I don't think there's really much of an auction going. If you put in 9 percent, they're not going to pay you 9 percent. I don't think they're compelled to do anything."

Making CDs work for you
The venerable CD remains a relatively straightforward money tool. In general, the longer you are willing to invest, the better your rate of return. The best place to shop rates and features? You're already there!

Callable CDs have the potential for higher returns after the non-call period if rates stay healthy, but can be losers if rates drop off and the bank does not call them. "In order to get your money out, you either have to die, or sell it in the market, which can sometimes be painful if rates have fallen a lot," Coan says.

Best bet: If you might need the money sooner rather than later, stick with a non-callable CD.

Shrinking ranks
Like many consumers, America's banks are being lured away from CDs by a better offer. "CDs do give banks flexibility, but banks are now turning to more wholesale funds to fund themselves," says Leggett.

"They're starting to use the Federal Home Loan Bank System, which allows them to match up their maturity structures. One of the problems banks have had is they'll lend long and fund themselves short. The Federal Home Loan program allows them to match up the maturity so you're borrowing long and you're lending long."

Leggett predicts: "It's going to create a more interesting market in CDs. Some banks will decide they're not going to pursue CDs as a funding option. Some bankers have found the market in CDs so intense that they find it more attractive to simply pursue wholesale funding."

Boomeranging boomers
There is little doubt that CDs will remain a favorite option for risk-averse investors who want safety of principal. After all, according to first quarter 1999 FDIC figures, CDs are our second favorite savings vehicle ($1.59 trillion) next to savings accounts ($1.61 trillion).

Coan says he wouldn't be surprised to see CD issuers follow the lead of credit card companies and offer free air travel, service discounts, even major appliances, in lieu of interest. And remember those baby boomers who cashed in their CDs in favor of mutual funds? Leggett says that, in all likelihood, they'll be back.

"As the baby boomers age, they are going to look at changing their investment mix. When you're younger, you are interested in growth; you want to build your nest egg as fast as possible. When you get older, you become more interested in income stream and not necessarily in building that nest egg, because that nest egg is at risk when you try to build it fast. So you start changing your portfolio makeup and that's going to move more into annuities and CDs, where you've got a fixed income coming in."

Building a big nest egg is fun, but in the long run, holding on to it is even more fun.

Jay MacDonald is a freelance writer based in Florida
This is an updated version of a story that initially ran on March 31.
To comment on this story, please e-mail the Bankrate.com editors.

Related information: More savings news Search the latest savings rates The basics: Savings Definitions: Banking terms

-- Posted: April 7, 2000