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CDs’ liquidity premium disappears

By Claes Bell, CFA · Bankrate.com
Tuesday, May 28, 2013
Posted: 4 pm ET

During normal times, banks and investors in certificates of deposit have an understanding: CD investors agree not to withdraw their deposits for a set amount of time, and banks pay them a little extra interest for the certainty that those deposits will be there if they need them.

But these aren't normal times, and that that little bit of extra interest, known as the liquidity premium, is doing a disappearing act.

In Bankrate's most recent survey, the average rate on a money market account -- basically a liquid, souped-up savings account -- is paying 0.11 percent a year.

Willing to give up that liquidity for more yield? You'll have to go pretty far down the yield curve to do so. Astoundingly, one-month CDs are actually paying less on average than money market accounts at 0.1 percent. In fact, you have to go all the way to six-month CDs before you get a tiny uptick in yields to 0.15 percent.

Even for maturities as long as one year, it's very possible to find liquid savings accounts that match CD rates. You have to go all the way to two years or even more to find CD rates that substantially beat the best liquid savings account rates.

The upshot is, with the liquidity premium being almost nonexistent, it doesn't make much sense to lock your money up when you could be earning more with a savings account from which you can withdraw funds at any time. That's especially true as the pace of the economic recovery accelerates and puts pressure on the Federal Reserve to begin tightening monetary policy and, potentially, raising rates.

What do you think? Do you still put cash in CDs rather than a savings account? If so, why?

Follow me on Twitter: @ClaesBell.
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