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Rising-rate CDs: flexibility, with a price

What's the trade-off

To help you decide whether rising-rate CDs are right for you, Bankrate surveyed 125 rising-rate CDs from large banks and credit unions around the country. Here are a few points to consider.

  • Maturity matters. The longer a rising-rate CD's term, the more time it has to make up for its lower initial yield with rate increases. The shorter the term, the less likelihood there is that a rising-rate CD would be able to match its traditional brethren.
  • In most cases, rising-rate CDs' yield to maturity, or the yield investors can hope to realize over the CD's entire lifespan, trail the best conventional CDs in Bankrate's CD database. That's because our survey found many rising-rate CDs' initial yields were so low, it is unlikely they'd be able to catch up to their higher-yield, conventional cousins.
  • Bump-up CDs were the most hamstrung by low initial yield of any of the rising-rate CD types. None of the bump-up CDs could match the top high-yield offers in Bankrate's database. Step-up CDs fared slightly better and liquid CDs fared best of all.
  • Initial yields on rising-rate CDs varied widely in our survey. For example, on 24-month bump-up CDs, the initial yield varied from 0.15 percent to 1.36 percent, depending on the institution. So, shopping around for the highest CD rates is critical.
  • Paying attention to terms is critical when it comes to choosing a rising-rate CD. We found wide variations in the way banks allowed CD investors to adjust or otherwise tweak their CDs. For instance, with liquid CDs, withdrawals could be limited to once, twice or annually during the term of the CD, depending on the CD's terms.

Overall, McBride says the question prospective investors in rising-rate CDs need to ask is, "Just how much do you have to trade away now in order to get higher rates later?"

The good news is, if you don't like any of the options we surveyed, just wait a few months and you'll probably see some crop up that are more to your liking, McBride says.

As the Federal Reserve nudges closer to raising short-term interest rates, more of these nontraditional CD products are likely to enter the market. They address what is sure to be a consumer reluctance to lock in to longer-term CDs as a run-up in the key federal funds rate approaches, he says.

Methodology surveyed the five largest banks and the five largest thrifts, based on deposits, in 10 large metropolitan markets across the country as well as the nation's 50 largest credit unions. It looked at all maturities available in step-up CDs, bump-up CDs and liquid CDs offered by each institution surveyed. In all, Bankrate surveyed 125 different products, including 15 step-up CDs, 61 bump-up CDs and 49 liquid CDs. The surveys were conducted from March 8 to March 18, 2011.

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