CDs are about as popular as anchovy ice cream, and with good reason.
I've been writing for a while now about the investor exodus from CDs in the face of record low CD rates. A new study by Market Rates Insight gives us some new information on the sheer scale of the decline.
Balances of certificates of deposits dropped by about $700 billion in the last five years, and their proportion of total deposits dropped dramatically. In January of 2007, CD balances made up almost one-third (31.1 percent) of total deposits, and by December of 2012, CD balances constituted only 18 percent of total deposits.
I recently spoke with Dan Geller, Market Rates Insight's executive vice president, about the study. He says that what's interesting about the decline in CD deposits is that deposits in general have gone way up in the past few years, so clearly, we're not seeing a situation where people are avoiding deposits altogether. It's just that CDs have become less attractive relative to savings deposits for two big reasons.
- The benefit in terms of yield for locking money up in a CD versus a more liquid savings account have diminished, Geller says. "The marginal difference in the APY between CDs and other liquid accounts, let's say savings or money market, shrunk, and it reached a point that for some consumers, the marginal difference was not enough to justify locking the money for a certain term."
- Uncertainty in the economy and especially the shaky job market made people leery of locking money away when it was possible they might need it to address a financial emergency, Geller says. "Some people opted to stay liquid, just in case."
While CDs are still useful for those looking for a risk-free place to stash some cash, the bottom line is, until rates improve, many investors are going to be hesitant to embrace a multiyear commitment for their money, says Geller.
"If rates are so low, why lock the money?" Geller imagines them saying. "Let's wait for better times."
What do you think? Why are investors staying away from CDs?
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