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CD Rate Trend Index

2010 a look ahead
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Will CD rates rise, fall or remain relatively unchanged? Experts and Bankrate analysts provide their insights. Search high-yielding CD and money market accounts.

Sentiment appears to be slowly changing from negative to a more neutral attitude.

Industry experts and Bankrate commentary
Experts' commentsShort-termLong-term
It's pretty clear -- rates aren't going anywhere for a long time. Savers need to consider alternatives. High-yield CDs for money that can't be risked; carefully or professionally chosen corporate or municipal bonds when some risk is acceptable.

I think short-term and long-term rates will remain stubbornly low. The announcement that the administration wants to increase the number of mortgage modifications is, to me, another serious sign of a troubling default rate. Also, the majority of adjustable-rate mortgages will come off their teaser rates in 2010. Because the timing of their purchases and some of the equity extraction that took place -- a lot of those homeowners are underwater and are vulnerable to rising interest rates; they're stuck. There's an embedded risk that if rates rise to quickly it's really going to roil the housing market. It's all about housing and jobs.

A lot of clients have been depositing money (with us) because of the banks' zero interest policies. We're investing that money in one- to three-year high-grade corporate bonds. The yields aren't stellar, but they're between 2.5 percent and 3.5 percent.

I also have exposure to high-yield, but I'm splitting my exposure between high-yield municipal bonds and high-yield corporate bonds. There reason for that is whenever I'm taking risk now I'm trying to do it a little bit more conservatively than I normally would. Usually, if I have a 10 percent weighting in high-yield, which I do today, I would just do corporates. But I'm splitting it now between high-yield municipal bonds and high-yield corporates because they're not exactly correlated. I would even put high-yield municipals in an IRA because they're yielding 7 percent. I'd advise using good mutual funds that are very diversified.
William Larkin, fixed income portfolio manager, Cabot Money Management, Salem, Mass.
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The news is still so mixed that I expect rates to bide their time where they are until next year. Inflation could cause them to come out of hibernation at some point, but I think that we'll need much better economic numbers in hand before that happens. Until then, insured municipal bonds seem to offer the highest yields with the lowest risks for those seeking safety, income and yield outside of an IRA. For the rest, structuring a balanced approach between different asset classes (with different correlation properties) will help capture potential yields and limit exposure to losses. We should have a little better idea of where we are and where we may be going after the first of the year.
Jason P. Flurry, president, Legacy Partners Financial Group, Woodstock, Ga.
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I don't think (the Fed) will be raising rates any sooner than the second half of 2010, if then even. They need to have perfect timing when they start raising rates because if they do it too soon, they throw us back into a recession. They've hinted they might let a little inflation creep into the system, but that's a very slippery slope in our opinion.

This may sound strange, but I would not keep everything in three- and six-month CDs because if anyone's shopped recently the yields are terrible. There's no incentive for banks to lend. They'd prefer to see the economy pick up first, so they're keeping excess reserves and they're buying Treasuries. They're keeping rates down and they're not going to be paying up much on CDs and other instruments.

Having said this, really short-term instruments should be a part of a portfolio, but I don't think you can live off of three- and six-month CD rates. You're going to starve. Normally, when we ladder we go from three months out to 10 years. Today we're investing from about six months out to five years. We've shortened the longer end. We might go six years but we are not going to go out much beyond that. You do have to park some money in the four- to five-year area but have it front-end loaded, meaning some coming due in six months, one, two and three years. Individual bonds and (high yield) CDs are fine.

Another concern is that rates have come down in a big way, even on corporates. I can get the same yield on a federally insured brokered CD as I can get on many A-rated corporate bonds. So why would you want to invest in an A-rated, or BBB-rated, corporate bond when you get the same yield on a CD? We think of a CD as a bond because it has a maturity and a set interest rate. It's something the typical retail investor can invest in. If you start buying corporate there's a lot of stuff you need to know.
Hebert G. Hopwood, CFP, CFA, president, Hopwood Financial Services Inc., Great Falls, Va.
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Athenian poet Agathon was quoted as saying "Even God cannot change the past." Investors should take these words of wisdom to heart. We can't go back; we can only try to improve what's ahead. The roller coaster ride of 2008 and 2009 has left many an investor dizzy with mumblings of "should have" or "could have" but the better use of time will be spent on "should do" and "could do."

The economy is soft, and the Federal Reserve is in no hurry to raise target interest rates. Even if economic conditions continue to improve, the Federal Reserve Open Market Committee will most likely attempt to reduce inflationary pressure by draining money out of the system versus signaling a sharp rise in target interest rates. So if the possibility of higher rates is pushed out into late 2010 or beyond, what are investors to do?

There are two major factors in bond yields: duration (length of maturity) and quality of issuer. The shorter the duration and higher quality of issuer the lower the yield. The six-month U.S. Treasury bill is paying a measly 0.17 percent. Short duration, high quality, low yield. Compare this to recent yields of a credit arm of a major motor company whose 10-year bonds are currently paying 12 percent. Longer duration, lower quality, higher yield.

In the foreseeable future, investors can't have it both ways -- higher yields with no risk. But like everything else in life, there can be a balance. The balance comes in the form of the purpose behind the investment. Short-term, high quality investments are used for an emergency fund, near-term college expenses, saving for a car and the like. Funding targets such as retirement, a toddler's college expenses or other long-term goals can utilize longer term, lower-quality investments. The longer duration allows investors a better chance to recover should the investment not work out as planned.

There is no escape from low yields for near-term funding needs, but you can improve upon what you are getting now. Investors should look into FDIC insured banks with higher CD, money market and checking account yields. There is a 1,900 percent improvement in return between a money market paying 0.05 percent and 1 percent. There aren't too many investors who would pass on a guaranteed 1,900 percent return on a stock, so don't settle for low short-term yields.

Those investors with intermediate to long-term goals can be more creative. There are numerous bond funds and several exchange traded funds (ETF) that offer a variety of duration and quality in their portfolios. Government, municipal and corporate bond funds are having record inflows. So why invest in funds or ETFs? Unlike common stocks, the complicated nature of bond investing puts the average investor at a major disadvantage. Hire a professional.

Investors should check for average duration and average quality prior to investing. Don't let the name fool you. The marketers have changed "junk bonds" into better sounding "high-yield bonds." These funds are generally longer duration and lower quality which means they may pay higher interest. But remember, the investment comes with higher risk.

International bond funds are another option for more adventurous longer-term investors. The quality of the issuer is still important. The lower perceived quality of the issuer, developed country versus emerging market country, the higher the yield. Emerging market bond funds or ETFs should pay higher yields compared to funds that invest in developed countries. Should the U.S. dollar continue to deteriorate, investments in nonhedged foreign bond funds should perform well.

The investor who focuses on the "should do" by matching the timing of their financial goals to the appropriate investment will lower the possibility of repeating the "should haves-could haves."
Edward W. Gjertsen II, CFP, vice president, Mack Investment Securities Inc., Glenview, Ill.
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The Fed will probably not begin to raise short-term interest rates until the employment picture begins to look better.
Lauren Prince, CFP, Prince Financial Advisory, New York
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Bankrate's analystsShort-termLong-term
2010 may be another disappointing year for savers if the Fed holds steady as long as they're hinting at, and especially if the Fed gets behind the inflation curve. Short-term CD yields are unlikely to post substantive improvement until the Fed is actually raising rates as capital-constrained banks are in no hurry to boost rates with deposits continuing to flow in.
Greg McBride, CFA, senior financial analyst, Bankrate.com
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The Fed's short-term rate tumbled from 5.25 percent in June 2006 to zero to 0.25 percent in December 2008. Savers have been treated rather rudely in an effort to prop up the rest of the system. Unfortunately, as we head into 2010, there still is no real indication that scenario will change. The Fed will move quickly to quell inflation and take some of the liquidity out of the system when they believe it's warranted, but that could be quite a ways off. In the meantime, savers who can afford to take on some risk would do well to review the advice of the professional advisers who comment in this section.
Laura Bruce, senior reporter, Bankrate.com
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Certified Financial Planners, Chartered Financial Analysts and others with similar qualifications are invited to e-mail us if interested in participating in our CD Rate Trend Index survey. Please state your professional background, title, company name and address.

About the Bankrate.com Rate Trend Index
Bankrate.com surveys experts in the financial planning, banking and mortgage industries to gauge whether certificate of deposit and mortgage rates will rise, fall or remain relatively unchanged. The deposit index panel consists of financial planners and representatives of institutions that offer FDIC-insured CDs to the consumer. The mortgage index panel consists of mortgage banks, mortgage brokers and other industry experts who are actively engaged in providing residential first mortgages to the consumer. Results from the CD Rate Trend Index are released monthly. Results from the Mortgage Trend Index are released each week.

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Product Rate Change Last week
1 Year CD 0.90%  0.01 0.89%
2 Year CD 1.03%  0.02 1.01%
5 Year CD 1.59% --0.00 1.59%
 
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