When it comes to no-risk fixed income, CDs, Treasuries and money market accounts are at the top of the list. High-yield CD rates across all maturities are still beating inflation and remain the highest yields available that come with a government-backed guarantee sticker.
High-yield CDs (1/27/2010)
The average yield for a three-month CD is 0.7 percent, with Excel National Bank and Nexity Bank taking top honors with 1.15 percent. Six-month CD yields top out at 1.4 percent, with an average of 1.03 percent. Lock your money up for one year and you can earn a top rate of 1.8 percent at State Bank of India or newdominionDirect.com, 36 basis points above the average yield of 1.44 percent. If you want to go out five years, the average yield is 2.9 percent, with a high of 3.25 percent.
Keep maturities shortIn a low-rate environment it's best to keep your maturities short. The rapid turnover of your CDs will allow you to take advantage of the interest rate hikes we all know are ahead. But some people are willing to venture out five years for various reasons. If you ladder CDs, locking in 3.25 percent on the long end of your ladder might not be a bad thing to do at this point.
Keep track of the five-year Treasury. Normally, you'd expect it to return less than the standard five-year CD because you'll pay full taxes on the CD interest, while the Treasury interest is exempt from state and local taxes.
But banks have been keeping five-year yields low and last spring the yield on the five-year Treasury began exceeding the yield on the standard five-year CD. At one point, the spread between yields was 55 basis points in the Treasury's favor. Add on the tax break and the Treasury wins easily.
That scenario reverted to the norm later in the year, but has now changed once more. The five-year Treasury yield is coming in about 30 basis points above the yield on the standard five-year CD. The Treasury, at 2.39 percent, is still a half percent below the five-year high-yield CD, but if banks continue to cut -- one year ago the average for a high-yield, five-year CD was 3.57 percent -- you may eventually see Treasuries beating high-yield CDs.
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