Interest on CDs still trending very low

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Like a balloon with a slow leak, yields on certificates of deposit -- the plumpness long gone -- have continued to shrivel this year.

The average return on a one-year CD was 0.30 percent nationwide this week, down from 0.34 percent at the beginning of the year, according to interest-rate tracker Bankrate.com.

That compares to the most recent peak of 3.77 percent in August 2007, just before the economy began to buckle and interest rates started their relentless descent.

For six-month CDs, yields averaged 0.19 percent this week, down from 0.22 percent in January and 3.55 percent in 2007. On five-year certificates, the average yield was 0.93 percent, down from 1.16 percent at the beginning of the year and 4.02 percent in 2007.

With the Federal Reserve promising to hold short-term interest rates at record lows into 2015 to help keep the fragile economy growing, "It will continue to be a long tough slog for savers," said Bankrate.com senior financial analyst Greg McBride.

PG graphic: How low can they go?
(Click image for larger version)

"The best you can hope for in the short term is that yields finally reach a bottom," he said. "Any meaningful improvement is still a long way off."

At the current average of 0.30 percent, a one-year, $10,000 CD would earn only about $30 in interest per year.

The meager returns underscore the need to have a diversified savings portfolio beyond cash investments, including dividend-paying stocks, bonds and real estate investment trusts, although those are not insured like bank deposits, Mr. McBride said.

The best way to maximize yields on CDs is to shop around, he said.

For example, although the average yield on a one-year certificate nationwide was 0.30 percent this week, savers could more than triple that return by picking a top-yielding CD paying 1.1 percent available at a number of federally insured banks nationally, according to Bankrate.com's weekly survey.

On a five-year certificate, the top payouts were around 1.75 percent to 1.8 percent, the survey showed.

Savers wary about doing business with an out-of-town bank shouldn't be, Mr. McBride said, as long as the institution is insured by the Federal Deposit Insurance Corp. and the individual investor's deposits don't exceed the $250,000 coverage limit.

Opening a CD isn't like opening a safe deposit box that requires access on a regular basis, he said.

"You put the money in and it will be there when it matures. You don't necessarily need a local bank or a bank with convenient branch locations."

Besides comparing rates on standard CDs, savers should ask about special deals. Banks often offer promotional rates when they want to attract deposits.

Locally, for example, First Niagara Bank is offering a specially-priced 12-month CD yielding 0.55 percent, significantly more than the 0.05 percent return on its regular one-year certificate, while ESB Bank has a seven-month promotional CD paying 0.45 percent.

There also may be other types of deals, such as higher rates for customers who maintain a checking account with the bank.

At First Commonwealth, customers with an active checking account can earn 0.30 percent on a one-year CD vs. the normal return of 0.15 percent.

Right now, instead of locking up money in a CD, depositors can do just as well parking it in a more liquid account.

The top-yielding bank money market accounts are paying around 1.05 percent, equivalent to the highest-paying one-year CDs, according to Bankrate.com.

Although savers may be yearning for a big spike in deposit rates, they should be careful what they wish for, Mr. McBride warned.

"The next time you see yields like [five years ago], we could see inflation at high levels," he said.

To find the best CD rates nationally, try www.bankrate.com and www.bauerfinaincial.com.

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Patricia Sabatini: psabatini@post-gazette.com or 412-263-3066


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