Our annual CD survey is out this week, and this year it focuses on rising-rate CDs, an unusual breed of time deposits that usually comes into play when CD rates are terrible, but looking to get better soon. As my colleague Sheyna Steiner pointed out in this space last week, CD rates have that first part covered pretty well:
Records continue to be broken, but for all the wrong reasons.
As you know, CD rates are at all-time lows. Since August 2009, the yield on the average one-year CD has been at record lows, falling below any rates recorded since Bankrate began tracking CD rates in 1983. Prior to August 2009, the previous low was 1.04 percent in July 2003.
Last week in Bankrate's weekly rate survey, the average yield on a one-year CD was 0.47 percent. Now, according to Market Rates Insight, a provider of financial information and analysis to the financial industry, a record amount of money -- 75 percent of total bank deposits -- is in liquid accounts such as savings and money market accounts.
It's easy to understand why the money is draining out of time deposits like water out of a busted bucket. Nobody wants to be the one stuck with a five-year CD yielding less than 2 percent as inflation -- and a ton of lost investment opportunities -- zoom past them. To address this concern, banks are marketing rising-rate CDs as an alternative to abandoning the CD market altogether, because they offer a couple of ways to capture a higher yield when rates go up.
For most investors, the best of the different types of rising-rate CDs looks to be liquid CDs, according to Greg McBride, CFA and Bankrate's senior financial analyst. McBride says they have some of the best initial rates among rising-rate CDs in our survey, and most of them keep it pretty simple: If you don't like your rate, take part or all of the money out without penalty and put it in a higher-yielding model somewhere else.
In other words, you get some of the flexibility of a liquid savings account combined with the generally higher rates of CDs. Of course, for a few basis points less, you can get an online savings account with almost complete flexibility. But McBride says banks will likely offer increasingly attractive rising-rate options as we get closer to a future run-up in CD rates, so they're worth keeping an eye on.