Chris Duncan

CD Investing In a Low Rate Environment



Posted: Thursday, September 02, 2010

by Chris Duncan
Jumbo CD Investments, Inc.

It appears as though we will have these low rates for an "extended" period of time.  Towards the end of 2009 and beginning of 2010, most thought a rate increase would be coming at the end of 2010.  However it looks like these low rates will be around through 2011 and maybe part of 2012.

The fact is we are no where near being out of the woods.  The real national unemployment is above 15% and some of the larger states, especially California, are nearing 20%.  That is one of out five people.  So far the private sector has been taking the biggest hit, but now the public sector is going to have to make some serious cuts.  There just is no way to raise taxes in this kind of environment.  If taxes are raised, it will be a viscous spiral downward.

For large Jumbo CD investors a strategy of mixing shorter CDs with longer-term can be a good way to hedge against further rate deterioration.  The average 1-year CD rate is between 0.75% to 1.00% and it would be good to pick-up those before rates go lower.  If you doubt that rates can go lower keep in mind that Fed Funds is near 0%.  1-year CD rates don't typically enjoy a 100 Basis Point difference.  When Fed Funds peaked in June 2006, average 1-year rates got to 5.35%.  That is a difference of 10 Basis points.  So yes there is still room for rates to fall.  Average 5-year rates weren't much higher at around 5.75%.  With average 5-year rates at 1.75%, they also have plenty of room to go lower.

So the second part of this strategy is to invest in longer term CDS with low penalties.  Consider this: 5-year CD at 2.15% with a 90-Day penalty.  If for some reason, rates go crazy in the next year and you close the CD to take advantage of higher rates, you would net 1.37%.  That rate is well above average 1-year rates.  If you end up holding it for 2-years, you would net 1.76%.  Again better than a straight 2-year CD.

Some ask me why I don't consider high-yield savings accounts.  Certainly if you need the funds to be very liquid, that can be the way to go.  There are still specials out there above 1.00%, but for longer-term needs, those rates can evaporate without notice.  And given current rate indications, they will.  The other thing is time.  Chasing savings rates around the country can be quite time consuming.  For CDs, you don't have to keep watching your rate, month-by-month.    

Chris Duncan is a FINRA Registered Representative. He works for Jumbo CD Investments, Inc., a leading CD placement and research firm.  He specializes in helping clients find the  best CD rates nationwide. His clients include individuals, financial institutions, corporations, and public agencies.  Visit to Compare Best CD Rates.
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Top-level comments on this article: (2 total)
» left by Grace O'Malley
 1 year 256 days ago.
42 fans.
If I had anything left to invest, this would be quite helpful. Anymore it's impossible to do that. Thanks for the information.
 
Grace
» left by Chris Duncan 1 year 255 days ago.
6 fans. Follow Chris Duncan on twitter!
I hear you. Tough times we live in. Thank you for your kind review.
 
cd :O)
» left by Chiradeep 1 year 252 days ago.
86 fans. Follow Chiradeep on twitter!
Very nice...keep it up...
 
Regards
 
CP
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