- The Washington Times - Monday, February 13, 2006

Slumping stocks,

rising interest rates

make CDs look

good again


Higher interest rates, mediocre bond returns and a lackluster stock market have pushed the certificate of deposit back into the investment portfolio.The numbers speak for themselves. Rates even on one-year CDs, which had dropped to 1.04 percent in 2003, have topped 5 percent. In contrast to that risk-free income, the S&P; 500 last year returned 4.9 percent, and taxable bond returns were 2.06 percent, according to Lipper Inc.

The last time CDs looked this good was in late 1999 and early 2000, when rates jumped from 4.3 percent to almost 6 percent, said Greg McBride, senior financial analyst at Bankrate.com, which monitors CD rates.

“The environment has improved dramatically thanks to the Federal Reserve interest rate hikes,” Mr. McBride said. “Cash investments look pretty good right now.”

Short-term interest rates tend to be governed by the Federal Reserve’s moves on monetary policy. As expected, the Federal Open Market Committee raised the federal funds target by 25 basis points to 4.5 percent last week and signaled its campaign of rate increases is nearing its end.

But the Fed likely isn’t finished just yet. Traders are pricing in an 85 percent chance that the Fed will raise rates to 4.75 percent in March, and some strategists think a further increase to 5 percent is possible. Higher rates may mean even better returns on CDs.

As short-term interest rates have climbed, banks have responded to consumers by increasing CD rates, said David Hendler, senior analyst at CreditSights. If interest rates continue to rise, Mr. Hendler predicted, CD rates will increase, too.

Sam Kirsch, first vice president for Mellon Financial Corp. in Pittsburgh, said the demand for CDs and other savings products has risen at the bank, which is offering returns of 3 percent to 4.5 percent on its CDs.

“For the first time in quite a while, it’s a viable investment for clients who aren’t traditionally conservative,” he said. “Clearly, CDs are offering some of the highest rates in the market right now.”

One of the biggest drawbacks for CDs — locking up your money for a long period of time — isn’t much of an issue right now. Higher short-term interest rates have pushed the rate on six-month CDs almost as high as that on five-year CDs.

“Yields are compressed in a very narrow range close to 4 percent,” said Scott Berry, a mutual fund analyst for Morningstar.

According to Bankrate.com, ETrade Bank of Arlington, Va., offered the highest rate on a six-month CD yesterday with an annual percent yield (APY) of 4.75 percent. Mutual Bank of Harvey, Ill., topped the one-year CD ranks with a 5.05 percent APY. The top five-year CD was only slightly higher, at 5.10 percent at GMAC Bank of Greenville, Del.

Investors can ensure cash remains available by using the popular strategy of laddering, or mixing up terms so their CDs mature at regular intervals.

Other options include liquid CDs, which can be cashed in at any time less some interest; bump-up CDs, which enable investors to get higher rates in certain circumstances; and inflation-linked CDs, with rates tied to the Consumer Price Index.

Thanks to the Internet, investors can now look more broadly for better rates. And banks no longer compete just in their local markets. Investments of more than $100,000 can be protected by dividing it among more than one FDIC-insured bank.

Another benefit of shopping around is that consumers could get into the market with a much smaller investment. Banks such as GMAC are offering 4.75 percent APY on a six-month CD for as little as $500. The rate climbs to 4.88 percent for a one-year CD.

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