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 Bankrate.com.
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?