July 5, 2013
Your hunt for your next CD is likely to be as disappointing as the last. In fact, it might be even more disheartening.
If you figured that the surge in mortgage rates and Treasury bond yields in May and June would finally mean that you'd be able to find decent interest rates in CDs or savings accounts, you probably won't like what you see at most major banks or credit unions.
Despite the fact that yields on 10-year Treasury bonds suddenly jumped to 2.5 percent from 1.6 percent from early May to late June, CDs have barely budged. The interest rates on CDs are still at record lows and likely to stay that way into early 2014, said Dan Geller, executive vice president of Market Rates Insight.
The average interest rate on one-year CDs surveyed by Bankrate.com recently was 0.66 percent. That is not going to end worries seniors have had about shrinking retirement savings — savings that haven't kept up with inflation when invested only in CDs. Geller said even five-year CDs are still near record lows, with just 0.75 percent interest on average. The institutions surveyed by Bankrate.com recently were averaging 1.24 percent for five-year CDs.
That's still below inflation, so keeping up with rising costs of living continues to be difficult. The U.S. government's measure of inflation, or core consumer price index, has been 1.7 percent for the past 12 months.
Ten-year U.S. Treasurys, after the dramatic move of the past couple of months, are finally keeping up with recent low levels of inflation, though holding on for 10 years could still be deficient if inflation ticks up to the 3 percent long-term average.
CD buyers may find themselves longing for the rates they found in 2008. Then, some banks were frantically trying to survive and offering 5 percent interest to get cash into the institutions.
Now, "banks are flush with cash" and have no need to do anything spectacular to attract more money, said Keith Leggett, senior economist with the American Bankers Association.
Neither he nor Geller see evidence that CD rates will climb much any time soon. "There's not demand for lending," said Geller. And banks typically offer higher CD rates when they need a lot of money coming into the bank so they can send it out to people and businesses wanting loans.
Recently, banks have claimed that neither individuals nor businesses have been eager to borrow. Individuals have had unstable jobs, limited raises and homes that carry mortgages that exceed their value. Small businesses still report slow demand and reluctance to borrow. Banks also shun individuals or businesses that don't have pristine credit scores.
"When the economy improves, lending will pick up," Geller said. But he doesn't expect CD interest to climb much through 2013. By mid-2014 that could be changing, he said. Yet even then, CDs might only be tacking on an extra quarter or half of a percent in interest above today's rates.
Leggett noted that CD rates tend to be tied to short-term Treasurys and the yields on them have moved little despite the huge surge in longer-term Treasurys that mature in 10 years.
The short-term Treasurys that mature in a year or 90 days will climb, he said, when the Federal Reserve starts raising the federal funds rate. But Federal Reserve Chairman Ben Bernanke has said that isn't likely to happen until 2015.
"Looking at the next 18 months ... we're in a low-rate environment," Leggett said.
On the other hand, people willing to hunt for CDs that pay more than the average may be able to find better deals if they use sites such as bankrate.com or nerdwallet.com or search "fixed income" offerings online at discount broker sites.
For example, a search of CDs at bankrate.com recently showed Colorado Federal Savings Bank and The Palladian Private Bank paying 1 percent for a one-year CD. GE Capital Retail Bank was paying 1.04 percent to people who would put $25,000 into a CD. Ally Bank was paying 0.94 percent.
Consumers can be confident about doing business with a bank over the Internet if the bank is FDIC-insured.
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