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Should investors buy rising-rate CDs now?

By Sheyna Steiner · Bankrate.com
Thursday, May 13, 2010
Posted: 2 pm ET

CD rates have languished for years now and antsy investors desperate for decent yields and anticipating rising interest rates may be considering rising-rate CDs as the answer to their prayers.

Whether or not they are the right product for you depends on how much you're willing to pay for convenience.

Donald Cummings Jr., managing partner at Blue Haven Capital, in Geneva, Ill., says that investors can accomplish the same goal, taking advantage of rising interest rates, by laddering CDs.

"I think if a person does that themselves they will end up with a better end result or yield than if they were to essentially pay a bank to do that for them," he says.

Here's how a CD ladder works. An investor would buy a six-month CD, a one-year CD, a two-year CD and a three-year CD.

In six months if CD rates are up, the CD coming due can be reinvested in a three-year CD.

"After a year if CD rates are still going up and my CD is coming due I push it out to a higher interest rate, maybe I go out three years, I always have a three-year horizon for this example," says Cummings.

The convenience of rising rate certificates of deposits means that investors sacrifice a bit of yield that they could have captured in a CD ladder.

For help building your own CD ladder, check out this calculator.

The flat yield curve past the three-year mark is something to consider with CD ladders, though, says Robert Laura, partner at Synergos Financial in Howell, Mich.

"You have some better rates in the short term, but you go out three, four or five years and you don't see much of a spread between those yields, if you stay short term it's a viable option. But you're not getting paid for the risk to go out past two-and-a-half or three years," he says.

And there's another drawback to rising rate CDs.

"Often on any rising rate anything, CD or variable muni, on the rate-change day the bond is also callable. So if it is going from 2.5 percent to 4 percent on the next rate hike and interest rates aren't that high yet, the bank can call that CD," Cummings says.

Though not all rising rate CDs come with a call feature, some do. That means that the bank can buy back your CD whenever it chooses, something that can be avoided with a CD ladder.

What is your strategy for mitigating interest rate risk while still getting the highest yields possible?

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