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10-year CD under 2 percent? No way

By Claes Bell, CFA ·
Monday, July 23, 2012
Posted: 4 pm ET

In a desperate quest to find higher yields, some savers are making a Faustian bargain with banks: for a few basis points more, and you can keep my money for 10 years.

Several of the nation's largest banks are offering 10-year CDs with a yield of 1.75 percent or less these days, including Chase, Bank of America, PNC and SunTrust.

But to give you an idea of what a bad deal that is, consider that the year-over-year inflation rate is currently 1.7 percent, and we're still in a pretty horrible economic slump, which tends to produce lower inflation. The headline inflation has actually been double its current rate as recently as 5 years ago, and has averaged 3.35 percent since 1913, according to data from the Federal Reserve Bank of Minneapolis.

Should inflation return to the historical norm, in other words, all those poor saps with their money in 10-year CDs at 1.75 percent will be stuck with a return of -1.6 percent annually, watching helplessly as their savings loses value each year. Sure, they could do an early withdrawal to try and get out of it, but withdrawal penalties have been getting stiffer as of late, and they may still end up losing principal.

Normally, frustrated savers would turn to the stock market or other venues to find better returns, but with the shellshock of the financial crisis lingering and uncertainty about the economy foremost in most investors' minds, that's less likely to happen these days. That means banks are getting a very good deal on your money by historical standards, writes Roben Farzad of BloombergBusinessweek:

Time was, when rates were unattractive, bank employees -- "tellers," they called them -- would point you to their mutual-fund desk or urge you to diversify rate risk by laddering across multiple account maturities. Now things have gotten so dreggy that depositors are increasingly willing to get locked in at a half-point over the 10-year Treasury note. The upshot: banks like JPMorgan can doggybag today's cost of funds well into the future.

So don't lock your money up for 10 years just for a few extra points of yield you might be able to get shopping around online. After all, at least one bank on Bankrate's CD rate table is offering a 1.75 percent yield … but on a 5-year CD.

What do you think? Would you be willing to lock your money away for 10 years for a few extra points of yield?

Follow me on Twitter: @ClaesBell

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July 28, 2012 at 2:05 am

If you've been in the CD business for a while now, I've been using Ally and they've been giving me a bonus .25% for renewing my CD's with them, and I can even change the term of the CD. Granted this isn't earth shattering, the point is to see if you're existing CD holders offer any incentives for renewing a maturing one.

Claes Bell
July 24, 2012 at 9:12 am

Brett: Thanks for reading. You're right that there are certainly banks out there offering more than large national banks on a 10 year CD. Unfortunately, 2.25 percent is still about a percentage point off the pace of historic inflation, so it's likely that if you bought a 10-year CD today, you'd be lagging inflation at some point during the life of the CD. Not sure if that's a bias, but it is my opinion.

July 23, 2012 at 11:25 pm

Discover Bank has a 2.25% 10-year CD, which is the one I'd focus on if writing an article without the author's particular bias. The early withdrawal penalty is better than some, at 9 months simple interest, and when you consider that the CD rate is half a percentage point or better than many sub 5-year term products, the penalty is certainly endurable if taken fairly early on, making this CD a decent hedge against current and ongoing uncertainty with rates and the market on whole.

July 23, 2012 at 6:36 pm