CD rates have been cut in half for most maturities since the beginning of 2009. Factor in inflation, and most CD rates put you under water. Even high-yield CDs are so low that savers who can afford to take on a small amount of risk are asking financial advisers to invest a portion of their maturing CD money in other fixed-income products.

In early January 2009, three-month, high-yield CDs, as surveyed by Bankrate, averaged 1.98 percent. Now, the average is 0.75 percent. Six-month CDs returned 2.54 percent in January, but have dropped to 1.15 percent now, 11 months later.

Savers probably shouldn’t look for the interest rate scenario to change significantly in the first several months of 2010. As things stand now, the Federal Reserve apparently sees no need to raise short-term interest rates in an attempt to calm what little inflation is present. That, combined with the FDIC’s Jan. 1 interest rate restrictions for less than well-capitalized banks and the fact that some banks that propped up the high-yield averages, such as Corus Bank, are now gone, could drag the high-yield averages even lower.

2009 high-yield CDs
Date 3 mo. 6 mo. 1 yr. 5 yr.
Jan. 6 1.98% 2.54% 3.08% 3.45%
Dec. 14 0.75% 1.15% 1.53% 2.85%

Standard yields are considerably worse with three-month CDs, averaging 0.37 percent, six-month 0.51 percent, one-year 0.82 percent, and five-year 2.08 percent.

Treasuries are exempt from state and local taxes, but the three-month, six-month and the 12-month are yielding 0.11 percent, 0.2 percent and 0.47 percent, respectively. You have to go all the way out to five years to earn 2.62 percent.

When it comes to no-risk fixed income, FDIC-insured high-yield CDs offer the best protection of your purchasing power even in this environment.

Nevertheless, low rates can be devastating for people who live on fixed income and rely on a certain amount of interest to meet living expenses. Financial advisers say one of the best ways to combat superlow rates is to keep a portion of your portfolio in stocks, ETFs and mutual funds to boost the overall return. Investment-grade corporate bonds and perhaps even some high-yield corporate bonds can add another layer of risk diversification, especially if you buy varying maturities.

Laddering for yields

CDs and Treasuries can provide the rock solid safety needed for money meant to meet living expenses and emergencies. Laddering high-yield CDs lets you take advantage of the better yields typically found on the longer end of the yield curve while maintaining a steady cash flow through the use of short-term CDs on the lower end of the ladder. Maturing funds that aren’t needed are reinvested on the long end.

It’s a good idea to keep money evenly distributed throughout the ladder. The short-term investments will be sensitive to interest rate changes, and that’s a good thing when rates begin to rise, but not such a great thing when rates fall. The long-term investments certainly boost your overall yield in any interest rate environment, but when those yields are historically low, as they are now, you don’t want too much money locked up in, for example, a five-year CD paying less than 3 percent.