CDs to yield pain without gain

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We’ve all heard the old saying, “No pain, no gain.”

Unfortunately for savers, 2011 looks to be another year of “Pain but no gain.” Or at least, negligible gain.

Interest rates on short-term savings vehicles don’t have far to fall before they hit zero. But no one expects the rate-setting committee at the Federal Reserve to hike short-term rates anytime soon.

Looking long term? Good luck. The rate forecast for 2011 is equally dim for long-term interest rates as well. Low inflation expectations will keep a lid on them, analysts say.

In the meantime, investors seeking liquidity in short-term investments will be earning close to nothing. Those who are willing to go longer on the yield curve — that is, to buy longer-term CDs — will be rewarded, but not by very much.

CDs in 2011

The ongoing struggle for savers will be finding adequate yields without taking on too much risk. Among the risks: Being stuck in a long-term certificate of deposit if rates — and inflation — start to rise.

Savers may be able to partially accomplish their aims by buying a long-term CD now and taking the early withdrawal penalty in a year or two if rates begin to move. For CDs with an average early withdrawal penalty, investors can cash out early and still come out ahead.

“A longer-term CD is a better buy now, with an outlook toward flat rates for a long period of time, than they will be once rates start moving up,” says Greg McBride, senior financial analyst at

“When rates start moving up, that is when you like having the flexibility of being able to reinvest. That won’t be a time when you’re necessarily looking to lock in,” he says.

Against that backdrop, Bill Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Mass., suggests that investors avoid illiquid savings vehicles such as CDs altogether.

“If you get into a CD you’re losing your flexibility,” he says. Plus, “almost anything else would produce more income.” For those investors who really desire the safety of a CD backed by the Federal Deposit Insurance Corp., Larkin recommends sticking to CDs with maturities of less than five years. “Instead of going to seven years, let’s keep it to three.”

Do the math

Use Bankrate’s CD calculator to find the best CD investing strategy for you.

When shopping for CDs, savers should search across the country. Local community banks in a booming business area may offer higher than average interest rates to attract deposits.

“Geographically, if the bank is in an area where business is picking up and lending increases, then hopefully the banks will raise interest rates a bit to bring some money in,” says Donald Cummings Jr., managing partner at Blue Haven Capital in Geneva, Ill.

The caveat? Don’t be dazzled by high interest rates. Double-check that the CD is issued by an FDIC-insured institution, or, if it’s a credit union, that it’s insured by the National Credit Union Administration. Nearly every bank, thrift and credit union in the country is required to carry FDIC or NCUA insurance, but scammers have been known to peddle uninsured CDs.

Research the safety of any bank using Bankrate’s Safe and Sound ratings.

An eye on indicators

To keep track of which way the interest rate winds are blowing, savers should keep an eye on Treasury security yields. They reflect everything from Fed expectations, how the economy is doing and inflation prospects.

“If you wanted one place to look to get a gauge, Treasury yields are a good representation of that,” McBride says of Treasury yields.

When the Fed will actually move interest rates is anyone’s guess. One thing is certain, however: It won’t happen until inflation is a concern. As a result, Mike Schenk, senior economist for the Credit Union National Association, fears savers may face a prolonged yield drought for the next several years.

“Without those substantial increases in economic activity, without improvements in labor markets, you won’t have inflation pressures,” Schenk says.

McBride concurs. “The best that investors can hope for would be very modest improvement (in yields) and even that is contingent on continued improvement in the U.S. economy and a move toward the Federal Reserve raising short-term interest rates,” he says.

Bankrate has a comprehensive analysis of where all sorts of interest rates are likely headed in 2011, and how these moves will affect you. Go to 2011 Interest Rate Forecast to view the full report.

« Back to the 2011 Interest Rate Forecast table of contents.

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