CDs Are Changing With The Times
Certificates of Deposit in 2012 and Beyond.
If you are like most cost-conscious and saving-savvy consumers or investors, and keeping a sharp eye on the interest rates, no doubt you have witnessed the snail-like pace that characterizes the rate of change. Meanwhile, anyone investing their hard-earned funds in CDs has the relative comfort of having their rate locked in for a certain period of time, and then letting the interest rates do whatever it is they do. This ambivalence lasts as long it takes to roll the CD over, and then the rate of change is perceived as either remarkable, or as in the most recent span of years, downright appalling.
As an example, supposing you had opened a 1 year CD at the onset of 2011, you more than likely had every expectation that the rate would have increased by the following year. The premise being that the rates at the time were historically low, yet the economy was showing some signs of life. Naturally, higher interest rates would be thought to follow accordingly. Quite the opposite occurred in the early days of 2012, and in no one’s favor, and especially for depositors. Here are just a few of the ways CDs are set to evolve in the coming year.
It has certainly become quite apparent that CD interest rate have taken a dramatic nose-dive across the entire spectrum. While they were indeed low in 2011, they have continued to hold a downward trend into the new year. The FDIC’s national average tracking had 30 day CD rates at 0.14% at the end of 2010. The following year brought them even lower, to 0.10%, and represented the mildest change of 4 basis points regarding most if not all CD term lengths. And it doesn’t stop there.
What is termed the ‘spread’ between the long term and short term CD interest rates has declined also, meaning that the decrease in rates was more significant in the longer CD term lengths. In the term-length category of 3 to 5 years, the basis point drop was as much as 35 or more. This translates into there being much less incentive to investing in a longer term CD now than there was just one year ago.
The old adage of ‘bigger being better’ no longer seems to be as much of an advantage with respect to CD investment size. For the larger category of deposits, which would generally receive the higher or premium rate structure, this theoretical benefit has been eroding over the same period of time. Compared to much smaller CD deposits, the rates on much larger jumbo CD deposits in the range of $100,000 or more are only maintaining a 1 to 3 basis point edge overall. In simple terms, bigger is not much better.
Now the inflation factor comes into play, because its rate has more than doubled since 2011, having serious influence within the CD rate sphere. The inflation benchmark was pegged at 1.5% at the tail end of 2010. Taking on a long-term CD back then translated into being on the plus side of that figure, but just barely, and only if you did some clever shopping. In the 2011 scenario, it became a new ball-game, because while the rates declined for CDs, the inflation continued to rise, and spent most of the year hovering anywhere between 3 and 4%.
The inflation factor just means playing your CD options carefully, with the current state of affairs dictating that CD term length should be kept shorter because the rates are lower, and the longer-term advantage is no longer as high. The strategy boils down to acquiring CDs of shorter term length, or, rolling the dice with longer terms that carry less severe penalties for early termination. The bottom line, as always, is to do some creative comparison research to maintain whatever interest rate edge you can get for 2012.
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