Looking for Value in CD Rates

Beauty may be in the eye of the beholder, but financial value is also very subjective. Take bank rates, for example--there is no simple answer to the question of what a good bank rate is. It depends on many factors: the inflation environment, the broader market for bank rates and other interest rates, whether you're referring to savings accounts, money market accounts, or CDs, etc.

Despite the subjectivity, just about any banking customer would agree that bank rates are low these days. Still, it is important to consider what the best deals are under the circumstances--granted, you might not like those circumstances, but there is nothing you can do to change them. So, you work on what you can control.

Case in point: if you are looking to buy or roll over a CD, are there some CDs that offer better value than others? The short answer is yes, if you look at the comparison between different types of rates.

Jumbo CD Rates: Size Matters, but Apparently Not Much

One way to get a little extra yield out of a CD is to buy a jumbo CD, which involves making a deposit of $100,000 or more. According to Federal Deposit Insurance Corporation (FDIC) figures from the last week of March 2010, you got the most bang for your buck (or your 100,000 bucks) at the 4-year level. Jumbo CD rates of 1 year or less were only 0.02% higher than regular CD rates of corresponding lengths. From there, the premium for jumbo CD rates over regular CD rates started to perk up, peaking at 0.06% for 4-year CDs. If you moved out to a 5-year CD, the jumbo rate fell back to being just 0.04% ahead of the regular rate.

Frankly, though, jumbo CD rates on average are not much more compelling than ordinary CD rates. That 0.06% extra on a 4-year jumbo CD would get you an extra $60 a year on your $100,000 deposit. That's worth having if you were going to invest that much anyway, but it certainly doesn't warrant making a special effort to reach that threshold. This is especially true when you consider the larger differences between short-term and long-term interest rates on CDs.

Relative Value: Short is Looking Better than Long

It is normal for long-term interest rates to be higher than short-term interest rates, and as of the last week of March 2010, interest rates on CDs fit into that pattern. Still, considering the tradeoff between length of commitment and rate levels, which actually represented a better deal? There's an argument to be made that short-term rates might have been a better value.

For maturities of two years or shorter, CD rates were higher than Treasury yields of corresponding maturities. The peak advantage was at the 1-year level, where CD rates were 0.37% higher than corresponding Treasury rates.

Once you move past the two-year mark, the relationship started to reverse. Three-year CD rates were 0.05% below 3-year Treasury yields. Five-year CD rates were 0.48% below corresponding Treasury yields.

This is just a snapshot of recent conditions, but it is an example of how to look for value in CD rates. Based on this snapshot--and the generally low level of CD rates--staying short-term seems preferable to locking into longer terms with inflation likely on the horizon.

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