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There's Real Juice In CDs


Would you rather lock up your money in a 10-year U.S. Treasury bond yielding 4.2% or stash it in a one-year, insured certificate of deposit with the same interest rate?

Finally, there's some juice in short-term investments. Nan Sabel, a financial adviser in Bedford, Mass., recently recommended that clients invest in one-year CDs yielding 4.4% offered by Countrywide Bank. And Susie Johnston, a financial adviser in Littleton, Colo., just started moving her clients' cash into nine-month brokered CDs offered through Charles Schwab yielding 3.9%. "CDs are much better than money markets and are not as risky as bond funds," says Johnston.

Higher short-term yields are the result of 10 consecutive rate hikes from the Federal Reserve, and at least several more are expected. In a rising-rate environment, the best advice is usually to stay in the shortest-term investments, namely money-market funds and U.S. Treasury bills. But at this point in the interest-rate cycle, one-year maturities will give you close to a percentage-point pickup above money-market rates without locking you in for a long time in the event that interest rates move higher.

Since May, average yields on one-year CDs have risen more than a quarter of a percentage point, to 2.98%, while yields on longer-term CDs -- including those with five-year maturities -- have barely budged, according to Bankrate.com. The sweet spot extends to two-year CDs, now yielding an average of 3.35%.

But don't bother going out any further on the yield curve. The difference between the yields of two-year and three-year CDs is only 0.17 points. So "investors should have no reason to go beyond two years in a CD," says Patrick Ifrah, president of Hutchinson Ifrah Financial Services in Little Rock.

And as the Countrywide Bank and Schwab examples illustrate, don't settle for average yields. Instead, use them as a benchmark. The best one-year CDs are yielding more than a percentage point above the average CD. To find banks with the most enticing yields, go to Bankrate.com. "The highest-yielding CDs might not be at the bank around the corner, but they are perfectly safe and FDIC-insured," says Laura Bruce, an analyst at Bankrate.com.

Keep in mind that CDs are not as liquid as money-market funds. Because you pay a penalty for an early withdrawal, think about your upcoming cash needs before locking in.

By Lauren Young


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