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2012 a terrible year for CDs

By Claes Bell, CFA ·
Wednesday, January 2, 2013
Posted: 6 pm ET

It's probably obvious to anyone who opened a certificate of deposit in the last year that 2012 was a terrible year for CDs.

The average annual yield on a one-year CD fell from 0.34 percent to an even more pathetic 0.28 percent. That means if you opened a $1,000 CD at the average CD rate on Jan. 2, 2012, you'd be collecting the princely sum of $3.40 in interest today. But you'd still be luckier than the poor sap who opened a $1,000 CD at the average CD rate on Dec. 31, who would be on track to collect just $2.80 in interest next New Year's Eve.

The average yield for a five-year CD fell even more sharply, from to 1.16 percent to 0.9 percent. With yields so low, it's no wonder the total amount invested in CDs nationwide fell 15 percent over the course of the year, according to Federal Reserve data.

Unfortunately, it's unlikely that things are going to be much better in 2013. The Federal Reserve has pledged to keep its benchmark federal funds rate near zero until unemployment declines below 6.5 percent, which the Fed doesn't expect to happen until late 2015.

It's possible an improving economy will lead to stronger loan demand, which is what drives CD rate decisions at most banks. I also think 2013 will see CD rates finally bottom out and begin rising gradually again.

But there are a number of economic bumps in the road, including the upcoming fight in Congress over a debt-ceiling extension in February and the continuing debt crisis in Europe, which could easily move in the opposite direction. And even significant economic improvement probably won't return average CD rates to anything approaching the norm by the end of the year.

What do you think? Will 2013 be a better year for CD rates than 2012?

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