CD Rate Trend Index

Investors should continue to stay in the shorter end of the market. I know it's tough to pass up a little extra yield, but with the Fed indicating that there will be no further near-term rate reductions and the prospect of increasing inflation, we might see significantly higher yields over the next six to 12 months.
William Z. Suplee IV, CFA, CFP, Structured Asset Management Inc., Paoli, Pa.

Short-term rates should rise as fear of the recession -- we are probably already in -- is subsiding and being replaced with a fear of inflation. Long-term rates should also go higher as evidence of strength -- or at least the lack of a serious recession -- keeps accumulating; leaving the Fed few places to go but up.
Herbert G. Hopwood III, CFP, CFA, president Hopwood Financial, Great Falls, Va.

It would be wise for the CD investor to stick with the shorter side in regard to the length of CD terms. The conservative investor really needs to start thinking about his or her goal of principal protection and consider the facts. Two months ago it cost me $53 to fill my tank, last week it cost $63. The USDA forecasts inflation on food to run at 4.5 percent to 5.5 percent for 2008. This type of inflation is seeping into our economy and there is no real short- to midterm end in sight. The fundamental principle to conservative investing is safety. I would argue true safety is achieved by considering real returns. If inflation is running higher than what your CD is yielding, you are, in real terms, losing money and therefore not achieving "real" principal protection. The challenge for CD investors is to balance their principal protection needs with their need to achieve real growth or at the very least maintain purchasing power of their retirement nest egg dollars. That being said, the investors who need to park short-term dollars or emergency funds unfortunately will have to accept the increased likelihood they will not achieve real growth on their dollars during the next one to three years (this negative compounded after considering taxation consequences of returns). The conservative CD investors looking for safety of their retirement nest eggs should pull the trigger and look outside the spectrum of CDs. There are traditional tax-deferred multiyear guaranteed fixed annuities paying a yield premium of 40 percent greater than the national average yield for a five-year IRA CD. In addition, there are four-year fixed indexed annuities that guarantee minimum yields in line with the national average 12-month IRA CD yield, but offer the opportunity for greater returns based on the performances of stock indices, but without the downside exposure. The bottom line is the conservative investor has choices outside of the traditional CD. In this economy, with the multitude of concerns stacking against the consumer, alternative safe investment solutions should be investigated, at the very least.
Michelle Ford, CFP, vice president Vantage Point Financial Services Fort Washington, Pa.

I was surprised to see the rates trend up recently. This is about six months sooner than I anticipated. But now that it's begun, you can be fairly confident that the trend will continue for the foreseeable future (albeit slowly). Rates are almost certain to rise long-term; and possibly rise substantially over the next 24 months. If people are considering CDs, then I recommend the shorter terms. No sense in locking money into low returns for long periods. In an economic environment where some economists are predicting the '70s or early '80s "re-lived," which means very high rates on cash equivalents (in the teens), it would be prudent to shy away from long-term CDs at this time. These economists may be on one end of the economic forecasting bell-curve, I know. And if they are, that means the center is somewhere between here and there -- which would be worth waiting for.
Mark C. Connell, CFP, CSA, president, Mark-Christopher LLC, Addison, Texas

As corporations continue to pass on higher commodity and energy prices, consumers are feeling an overwhelming squeeze on their wallets. As a result, consumer sentiment resides near 28-year lows. The last time consumers were this pessimistic about the economy was in 1980, when unemployment rates were rising over 7.5 percent, mortgage rates were above 14 percent and core inflation was near 13.6 percent. Until the seemingly unstoppable rise in energy prices comes to an end, the Fed will remain concerned about inflation. In an effort to limit inflationary pressures, many economists predict that the Fed may be forced to begin raising interest rates as early as the third quarter of this year with most agreeing that by the first quarter of 2009 we will have begun to see interest rate movement. Investors should continue to consider avoiding long term instruments as they may not be fairly compensated given an eventual rise in interest rates is likely. Locking in low rates for extended periods generally is not advantageous for investors, and the flexibility of a short-term laddered approach should be considered.
Kurt J. Rossi, CFP, CRPC, Independent Wealth Management, Wall, N.J.

Some relief for fixed income investors; rates have begun to move higher and I expect this directional shift to continue over the next few months. The Fed looks to have transferred their attention to inflation, which would indicate the end of their recent interest rate cuts. Rates will move up gradually from here, so look at short-term CDs that you can reallocate to higher-yielding alternatives a year from now.
N. Barry Vosler, CFP, Linsco/Private Ledger, DeWitt, Iowa

Despite the recent trend of rising CD rates, it's my opinion that there will not be any appreciable change in CD rates over the next 18 months. With the country and the world getting more enmeshed in rising oil and grain prices, growth will diminish considerably. Here in the U.S. we've become victims of the leverage bubble that's existed for the past 25 years. The government, corporations and consumers find less and less in their fiscal coffers with each passing day. Bottom line: With less and less liquidity becoming apparent each day, where will the money come to pay higher CD rates? On the flip side, will we approach Japan's 0.5 percent interest rate? Let's hope not.
Thomas Grzymala, CFP, AIFA Principal Forensic Analytics LLC, Keswick, Va.

The Fed may need to raise interest rates by year-end to help stave off inflation. Core inflation remains low, however companies can only become so lean and efficient before they need to pass their increased costs onto the consumer. Will the U.S. consumer be able to absorb these price hikes or will higher energy and food costs keep them on the sidelines? Time will tell. I anticipate that equities will remain in a limited trading range for the majority of 2008. Stocks or funds that invest in global consumer staples should hold up well within our uncertain economic environment. Keep bond portfolios well diversified with a focus on high-quality intermediate term positions as well as some limited exposure to TIPS and foreign bonds.
Steven Lautenschlager, CFP, vice president First Business Trust & Investments, Appleton, Wis.

CD yields are unlikely to show the improvement in June that they showed in May, despite continued worries about inflation. The best thing for CD yields is if the Fed takes a hard line of inflation and hints at a rate hike, but don't hold your breath.
Greg McBride, senior financial analyst, Bankrate.com

We've seen some interesting gains in CD yields during May. The six-month average rose just 2 basis points, but the one-year jumped 15, the two-year rose by 10 basis points and the five-year by 24. The two-year Treasury saw a 36 basis point hike during the period. Clearly, people are on both sides of the road as to what they think will happen in June, but the prevailing advice is to stick with very short-term CDs if you're buying.
Laura Bruce, senior reporter, Bankrate.com