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Use caution on longer-term CDs

By Claes Bell ·
Monday, March 21, 2011
Posted: 12 pm ET

Jane J. Kim has an article this month in the Wall Street Journal on how banks are finally beginning to bump up CD rates, especially on longer-term CDs.

In general, rates had fallen since the financial crisis. "Last week was the first broad-based move higher in quite some time," says Greg McBride, senior financial analyst at

The changes partly reflect the recent rise in yields on longer-term Treasurys amid expectations of higher inflation. Before the turmoil in Libya and Egypt broke out, the "yield curve," or the gap between two- and 10-year Treasury yields, had widened to near-record highs, and it remains steep by historical standards. For banks, a steeper curve makes it easier to offer higher rates on longer-term CDs.

Another driver: More businesses and consumers are looking to take out long-term loans, spurring banks to collect more deposit money to lend out. "A lot of what we're seeing on long-term CDs is an attempt by banks to lock in low-cost funds for a period of several years," Mr. McBride says.

After more than two years of terrible rates on CDs, these yields may look pretty tempting. But as our own Greg McBride points out, the motivation here is clear: Banks want to lock in investor money into low yields now so they can maximize their returns on future loans as rates rise in the years ahead.

Unfortunately, that's not such a great deal for CD investors. If rates go up as banks are anticipating, such investors will find themselves sitting on the sidelines watching as CD rates -- and inflation -- rise along with economic growth. In that scenario, what paltry return those investors realize will be further eroded by a shrinking dollar.

In interviews I've been making for an upcoming on story on how CD rates are set, one thing my sources agree on is CD investors need to be cautious about locking in to longer maturities right now. Instead, a better strategy for CD investors may be to remain short for now, and gradually increase the maturities of CDs as rates on shorter maturities rise going into 2012. The low rates on shorter-term CD rates may hurt, but getting locked in to a low rate for five or 10 years could be even more painful in the long run.

What do you think? Is putting money in long-term CDs dangerous right now? Or should investors pounce on these higher rates while they can?

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April 21, 2011 at 11:59 am

I don't agree with your position on buying long for CD's.
I use the experience that I invested for a 30 month CD at Simple interest of 3 % about 20 Months ago. Had I used the position you recommended back then, I would not be enjoying the rate I have now. It still has not caught up to what I have now. I am not alone in this thinking, many others have done the same thing. Yes, I would not go long now on CD's but there are other things besides CD's. Example, there are a few (not many) buying depressed homes on the market. Three or four people would invest
to buy the home, repair it and flip it for a nice profit divided equally. Hire your own repair contractor. Try to get that type of return on a CD at todays's rate. Of course you have to do your homework, before buying a house and property. Not just any house will work for you.

example: Purchase $80K house divided between four people = $20K
invested. Sell for $120 and divide 40K profit allowing for repairs and Taxes or finance the home at 10 percent.

Michael Butler
March 22, 2011 at 7:27 pm

go short on jumbo cd's for now!

Michael Butler
March 22, 2011 at 7:25 pm

Jumbo cd rates are goverened by the prime rate and treasury security yieds. Bernanke has propped this mkt. up on stillt so bad people are buying the kool-aid. I was fortunate enough to buy in 2008 after the fannie and freddie crash to have some jumbos sitting around earning over 5%. Let us all hope that we will see 5% again in the next 3 years before we see 2% again on the Jumbos.

I feel sorry for so many of the un-employed people that got caught in the mtg. backed securites crisis. A couple of people made out like bandits and called the fannie and freddie short right. Jumbo Cd's and annuities are great safe bets. Cash is so cheap now and China owns America. Citigroup had to reverse split to survive. "C" had over 25billion in tarp monies given to them! Hard to call which big board will fall next to the poor common share stockholder who will be the next vitim! Glad to see the permanent 250k fdic insurance on jumbos,,at least the fed did something right! lol.

March 22, 2011 at 5:01 pm

I read the wall street journal article and this article. These articles or blogs or whatever they are, well, you just wasted your time typing. If you think the larger banks can barely offer 2% on a long term CD is a rise in their offers then its a joke. Low rates are staying. No one in their right mind is going to open CD's Bank of America , Citibank, or any of the large banks for that matter. These articles are just repeats of information from the banks themselves. Funniest thing about this article is: who are your sources? I wouldn't believe everything your sources say. Lol, its probably big banks. They gonna offer 2.10% instead of 2%. Good grief give us something new.

Matt Galbraith
March 22, 2011 at 1:10 pm

I use Ally Bank and do the 5 year cd's. They have a two month interest penalty but the earnings are double or triple the average short term rate so as long as I stay put for 3-4 months then I'll be coming out ahead. People that don't like to bank electronically probably won't like this bank as it is strictly online but I have had nothing but positive experiences with Ally.

Lucas Smith
March 21, 2011 at 8:13 pm

I agree that it isn't a great idea right now. It is tempting though as Cash is earning just about nothing. I guess it would be an ok deal if you get a CD that you can get out of with a couple months interest penalty (a lot of them you can, it is just a hassle).