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CDs may lead savings rate recovery

By Claes Bell ·
Tuesday, December 18, 2012
Posted: 11 am ET

There's not much good news out there for investors in certificates of deposit these days. CD rates currently sit at record lows. Rates on one-year CDs have been below 1 percent since September 2009.

But, there's a little bit of good news. When deposit rates do rise, CDs will probably lead the pack, says Dan Geller, executive vice president for Market Rates Insight, a banking industry research firm in San Anselmo, Calif.

Deposit rates are largely driven by banks' need for cash. When the demand for new loans is low, as it is now, banks don't really need a lot of cash on hand, so they're not willing to pay a lot for deposits.

However, at some point, lending will pick up and deposit rates will rise. When that happens, CDs will rise more quickly, again commanding a premium over liquid savings accounts that's been almost nonexistent in recent years, Geller says.

"The increases on term accounts -- on CDs -- will be much more significant and rapid than liquid accounts," Geller says. "In times of need for liquidity, the preference is to get term liquidity because it's much easier for a bank to project forecast liquidity when the money is locked in for a certain term."

That's because banks lend out money for a specified period of time. They can't demand that you pay your car loan back in a lump sum tomorrow just because they need the cash. So, when they start making loans again, they'll want to attract deposits that come and go in predictable ways, Geller says.

"It's hard to do with liquid accounts because in a way you really don't know how it will flow -- when people will take money out," Geller says. "With term accounts, you have an idea. If it's for one year, you can assume that a certain amount of it will stay there for one year."

So buck up, CD investors. While things are still looking grim right now, when the economy does pick up, you may reap the benefits more quickly than other deposit account holders.

What do you think? Have you shifted from CDs into liquid savings accounts since CD rates fell? Would you switch back if CDs offered significantly higher returns than savings?

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