investing

Treasuries clobbering 5-year CDs

Highlights
  • "Large market share often equates to significant pricing power."
  • Banks aren't charities; they're in business to make money.
  • Bank-hopping for rates may not be the most beneficial route.

Only in a twisted scenario will you see Treasury yields higher than the yields on CDs of comparable maturities. Treasuries almost always have lower yields due in large part because the interest is exempt from state and local taxes. But right around mid-May the tables flipped on the five-year maturities.

According to Bankrate surveys, that's when the weekly average yields of five-year CDs began to look a tad shabby when compared to five-year Treasuries -- and that's without factoring the tax break.

Widening yield spreads

In mid-May, the yield spread between the two was 24 basis points. By early August, with the average yield for a five-year CD at 2.18 percent and the five-year Treasury at 2.73 percent, the spread had widened to 55 basis points.

"Some larger (banks) are offering very uncompetitive rates on long-term CDs in an effort to breathe even more life into their interest margins," says Greg McBride, senior financial analyst at Bankrate.

"Large market share often equates to significant pricing power. A lot of these banks are already swimming in deposits. Banks that don't have to pay up for deposits won't. Also, people tend to be sloppy with their cash and there are undoubtedly a lot of investors that will unwittingly roll over a maturing CD at prevailing rates."

During this particular week, Bank of America's five-year CD is yielding 1.85 percent in all of the nation's top 25 metropolitan markets except for Los Angeles, where it's 2.1 percent. The yields for Chase, Wachovia and HSBC are 1.25 percent, 1.16 percent and 1.01 percent, respectively.

Of course, the Bankrate rate average of 2.18 percent is the result of some other banks paying considerably above average, such as Citibank, which is paying 3 percent.

Bank of America, Chase and Wachovia refused to talk with us about their rates. HSBC spokesman Neil Brazil provided a statement.

"HSBC actively monitors the market to ensure its CD yields are competitive. For those looking for a great longer-term rate, a 48-month online CD from HSBC Direct is currently paying an annual percentage yield of some 2 percent. With a minimum balance requirement and FDIC protection, we think that's a pretty good deal."

That's all well and good if a consumer has some flexibility in his or her fixed-income plan. But it doesn't help the person who ladders CDs and needs to replace the five-year rung. And it doesn't help the person who is saving for a specific goal five years away and wants to lock up the money with a decent rate.

Fend for yourself for higher return

But banks aren't charities; they're in business to make money and have no need to pay higher rates if consumers are scooping up their low-yielding CDs.

If you want the best return, you have to fend for yourself. Don't expect your bank to constantly supply you with a top tier rate in the particular maturity you want. Sometimes it might be another bank or a credit union or the Treasury Department that's offering a better deal.

The availability of online accounts makes it easy to research rates and open accounts. But bank-hopping for rates may not be the most beneficial route. A little bit of homework will unveil the institutions that have the mindset to consistently be among the better deals.

Bankrate can help in your search. Peruse the high yield tables for CDs and money market accounts to find yields that will significantly improve your returns.

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