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4 ways CDs have changed

January 12, 2012

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

interest rates

If you watch interest rates frequently, it can seem that changes come very gradually. However, CD depositors have the luxury of locking in a rate and forgetting about the interest rate market -- until it's time to roll over into the next CD. Because of the passage of time, those interest rate changes can seem more significant, and in the case of recent years, even shocking.

For example, if you opened a one-year CD at the beginning of 2011, you would have had every right to expect higher rates by the time you had to roll that CD over. After all, rates were at historic lows at that point, but it looked as though the economy was starting to improve. Surely, that set the stage for higher interest rates in a year's time, right?

Wrong. Interest rates on CDs had certainly changed by the start of 2012, but not in favor of depositors. Here are four changes you should be aware of as you shop for CDs in 2012:

  1. CD rates have fallen across the board. If CD rates seemed low a year ago, you may be surprised to see that they have drifted even lower. For example, according to national averages from the FDIC, one-month CD rates ended 2010 at 0.14 percent; by the end of 2011, they had fallen to 0.10 percent. That drop of 4 basis points was the mildest across all CD lengths.
  2. The spread between long and short CD rates has narrowed. The drop in CD rates over the past year was more extreme in the longer term lengths: CDs of three to five years dropped by 35 basis points or more. This meant that there is less of an advantage to locking your money up for a longer time than there was a year ago.
  3. There is a size advantage -- just not much of one. Another edge that has been slipping away is the premium rate for large deposits. On average, jumbo deposits of $100,000 or more earn rates that are just one to three basis points higher than CD rates on smaller deposits.
  4. Inflation has more than doubled. Another important change over the past year is the inflation context for CD rates. At the end of 2010, inflation was at 1.5 percent. You could just get ahead of that by choosing a long-term CD, especially if you shopped around. Now it's a different story. While CD rates slipped in 2011, inflation rose, spending most of the year above 3 percent, even flirting with 4 percent at times.

Inflation may be the clinching factor that encourages you to keep your CD terms short this time around. Low CD rates and a smaller advantage for longer-term CDs certainly argue in favor of shorter terms, and losing ground to inflation is an especially compelling reason for keeping your options open. That means looking at shorter terms, or at longer-term CDs with mild early termination penalties.

In any case, you can still add significantly to your CD rate by doing some comparison shopping. That's one of the few remaining edges CD customers have in their favor as 2012 begins, so be sure to take advantage of it.

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