After years of decline, long-term CD rates are finally beginning to rise at some institutions. One such institution is Apple Federal Credit Union, offering easy membership to everyone, which recently raised their ten-year CD rate from 3.25 percent to 3.5 percent APY. Another is Ally Bank, my favorite place to stash your cash, which raised their five-year CD rate one basis point to 2.40 percent APY. Could this be the beginning of a change in direction from the long decline?
CD rate changes lag Treasuries
Rates on ten-year Treasuries have risen approximately 1.11 percent from 2.38 percent in October 2010, to 3.49 percent as of last Friday. Yet CD rates have only risen recently at some institutions and continue their decline at many others, giving CDs less of an advantage over Treasuries. And while there is currently no advantage on the ten-year CD, there are still huge advantages in shorter-term maturities.
According to DepositAccounts.com founder Ken Tumin, CD rates typically lag Treasuries by about one to two years, meaning it could be another year before we see a full blown trend.
What to do now
CDs have attractive rates today. I've noted that the Ally Bank CD only has a sixty day early withdrawal penalty. As an example, the 2.40 percent APY five-year CD still yields 2.00 percent if withdrawn in one-year, after paying the penalty. This compares to a one-year Treasury yield of only 0.26 percent. All early withdrawal penalties are not created equal, however. Apple has a penalty of up to three years' interest.
Here are some simple steps to finding a good CD rate.
- Find the highest CD rates. DepositAccounts.com is the place I always start.
- Research the early withdrawal penalty. Make sure you can live with it and that they don't sneak in language that gives them the right to refuse an early withdrawal or change the penalty.
- Make sure your deposit is insured by the FDIC or the NCUA. Go to their web sites and make sure the institution is a member and that you are staying below the limit.
- Confirm that you actually received the rate. If it takes a few days for the institution to receive the funds, they can always change the rate in the meantime. Ally-Bank guarantees the rate for ten days.
- Mark the maturity date on your electronic calendar. Many banks count on stickiness and have a habit of rolling your funds into a new CD at whatever happens to be their going rate at the time.
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