Long-term CD rates fell during April, both on an absolute basis
and relative to shorter-term CDs. Normally, that would make longer
CDs less attractive, but the economic news of the month makes
long-term CDs worth a closer look.
When April began, the
five-year CD rates at an average of 1.12 percent, while one-year CD
rates averaged 0.30 percent. By the end of the month, five-year CD
rates had slipped to an average of 1.10 percent, while one-year CD
rates held steady.
Despite this diminished yield advantage, here are four economic
developments from April that make longer-term CDs worth
Slower job growth.
Jobs are probably the most important variable in today's economic
situation. With government and personal debt running high, there
is little room for borrowing to stimulate the economy. Only
rising incomes could put more money into the economy on a
sustainable basis, and that will only occur when more people can
go back to work. Unfortunately, job growth tailed off in March,
and even more so in April.
Weak orders of durable goods.
Durable goods are the big-ticket items whose purchase signals
that people are really feeling good about the economy. When it
was reported that orders for durable goods had declined by 4.2
percent over the previous month, it appeared to be a vote of
no-confidence for the economy.
The Federal Reserve stands pat.
Meeting in late April, the Federal Reserve's Open Market
Committee decided to hold steady on its interest rate policy,
which calls for low rates until at least 2014. This was partly in
reaction to the economic environment, though the Fed's approach
to that environment reinforces that interest rates on CDs are not
likely to rise very soon.
Real GDP growth fades.
Near the end of April, the
Bureau of Economic Analysis reported
that real economic growth had slipped to 2.2 percent in the first
quarter of 2012, after having reached 3.0 percent the previous
quarter. This confirmed the growing impression that the economy
is starting to lose momentum.
All of the above suggest that it will be many months before CD
rates start to rise. If that's true, then the prospect of earning a
higher yield by locking into a long-term CD becomes more
Perhaps one drawback to this argument is that while
inflation stalled in April
, the yearly figure remains at 2.3 percent, and the idea of locking
into a long-term CD at less than half the prevailing inflation rate
is never going to be an attractive idea. But if the trend toward
easing inflation persists, this may become less of a concern.
Under these circumstances, the best answer may be to maximize
your yield by shopping for the best CD rates, and looking for
longer-term CDs that have relatively mild early-withdrawal
penalties. For example, if you can find a five-year CD with a
penalty equivalent to six months or less of interest, you could
cancel after one year and still come out ahead of what you'd
typically earn in a one-year CD.
If it turns out that
interest rates on CDs
don't rise for a few years, you could hold onto that five-year CD
and come out well ahead of what you would have earned by rolling
over short-term CDs during that period.