Ask the Expert: CD Rates and Length of Commitment
July 21, 2010
Q: Aren't CD rates supposed to go up with a longer time commitment? Sometimes I see banks offering a range of CDs whose rates increase as the terms increase, but then dip toward the end. I've also seen CD rates that start to increase with longer terms, then dip in the middle (say at 18 months), then increase again. Why is that?
A: There are a couple of possible explanations:
- While it is a general tendency of CD rates to go higher as terms lengthen, it is by no means a certainty. The best way to think of this is that CD rates include an implicit forecast of where bank rates will be in the future. The nature of that forecast can determine the pattern of CD rates along different term lengths. A simple example that defies the general rule is that when bank rates are unusually high, longer-term rates may well be lower than short-term rates because banks are wary about getting locked into the unnaturally high rate for a long period of time.
- It's also worth noting that some CDs have special features -- callability, index-links, etc. -- which can affect their apparent yields. As rule of thumb, unless you have a strong understanding of those special features, stick to plain vanilla CDs.
The fact is, you may often come across apparent anomalies in CD rates -- both within a single bank's range of offerings, and especially when comparing across a range of banks. This is why shopping for CD rates is so important -- you may find anomalies that work in your favor.
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