Smart bank customers know that they can earn more interest by shopping around for different bank products, so they might be especially interested to know when that kind of diligence has the highest rewards. When it comes to certificates of deposit (CDs), the opportunity to do better than the average rate seems to become greater as you move out into longer CDs.

This means that if you were thinking about moving out into longer-term CDs, you have the opportunity to be paid a little extra in two ways. Longer-term CD rates are naturally higher than shorter-term CD rates, so you can earn more that way. You can layer still more additional yield on top of that if you shop around for the best CD rates, rather than settle for average, and again, the difference between the best CD rates and average ones becomes wider as CD terms get longer.

A Yield Curve for CDs

One way to think about the rates on CDs of different lengths is as a yield curve. In the bond market, a yield curve is the series of yields on bonds of different maturities, from short-term to long-term. The yield curve is usually upward-sloping -- that is, yields get higher as bonds get longer. The main thing that changes, besides moving up and down as a whole, is that the yield curve is steeper at some times than at others. The steeper the yield curve (assuming the normal, upward slope) the greater the reward for choosing long bonds.

You can think of CD rates in the same way. For example, in late June 6-month CD rates averaged at 1.50%, 1-year CD rates averaged 1.91%, and 2-year rates averaged 2.13%. This yield curve showed the normal increase in rates with longer time frames, but the slope was not as steep as in the bond market. With the average CD, the reward for venturing out from 6 months to 2 years was 63 basis points, whereas in the Treasury bond market, the corresponding reward was 81 basis points.

Top Rates Make the Curve Steeper

Interestingly though, if you shopped for the best CD rates, you'd find a yield curve just as steep -- meaning just as rewarding -- as in the Treasury bond market. Ignoring purely local or regional offers, the best widely-available 6-month CD rate was 2.05%, or 55 basis points higher than the average 6-month rate. The best widely-available 2-year rate was 2.87%, or 74 basis points higher than the average 2-year rate.

Because the reward for shopping around was higher in the 2-year category than in the 6-month category, this meant that active shoppers would find a steeper yield curve. In fact, the difference between the best 2-year rate and the best 6-month rate was 82 basis points, or almost exactly the same spread as in the Treasury bond market.

Conclusions

This is not necessarily a recommendation to choose longer-term CDs. There are other considerations involved in that decision, including your liquidity needs and your outlook for where interest rates and inflation are heading. However, if you are considering a longer-term CD, it is worth knowing that the rewards for shopping around can be especially great in that market. A little time can earn you a better opportunity.