2011 Interest Rate Forecast » Scant interest in savings, CDs
We've all heard the old saying, "No pain, no gain."
Unfortunately for savers, 2011 looks to be another year of "Pain but no gain." Or at least, negligible gain.
Interest rates on short-term savings vehicles don't have far to fall before they hit zero. But no one expects the rate-setting committee at the Federal Reserve to hike short-term rates anytime soon.
Looking long term? Good luck. The rate forecast for 2011 is equally dim for long-term interest rates as well. Low inflation expectations will keep a lid on them, analysts say.
In the meantime, investors seeking liquidity in short-term investments will be earning close to nothing. Those who are willing to go longer on the yield curve -- that is, to buy longer-term CDs -- will be rewarded, but not by very much.
CDs in 2011The ongoing struggle for savers will be finding adequate yields without taking on too much risk. Among the risks: Being stuck in a long-term certificate of deposit if rates -- and inflation -- start to rise.
Savers may be able to partially accomplish their aims by buying a long-term CD now and taking the early withdrawal penalty in a year or two if rates begin to move. For CDs with an average early withdrawal penalty, investors can cash out early and still come out ahead.
"A longer-term CD is a better buy now, with an outlook toward flat rates for a long period of time, than they will be once rates start moving up," says Greg McBride, senior financial analyst at Bankrate.com.
"When rates start moving up, that is when you like having the flexibility of being able to reinvest. That won't be a time when you're necessarily looking to lock in," he says.
Against that backdrop, Bill Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Mass., suggests that investors avoid illiquid savings vehicles such as CDs altogether.
"If you get into a CD you're losing your flexibility," he says. Plus, "almost anything else would produce more income." For those investors who really desire the safety of a CD backed by the Federal Deposit Insurance Corp., Larkin recommends sticking to CDs with maturities of less than five years. "Instead of going to seven years, let's keep it to three."
Do the mathUse Bankrate's CD calculator to find the best CD investing strategy for you.
When shopping for CDs, savers should search across the country. Local community banks in a booming business area may offer higher than average interest rates to attract deposits.
"Geographically, if the bank is in an area where business is picking up and lending increases, then hopefully the banks will raise interest rates a bit to bring some money in," says Donald Cummings Jr., managing partner at Blue Haven Capital in Geneva, Ill.