A Time for Time Deposits

by Stanley D. Smith , Gary E. Porter and James H. Gilkeson

A Time For Time Deposits Splash image

The current market is a tough one for investors to navigate.

Equity markets appear to be all volatility and no return. According to Morningstar, the total return on U.S. equities for the last five years was only 0.33% per year, with large-cap stocks losing 0.23% per year.

Bonds have done better, due to the substantial decline in yields in recent years. Morningstar reports a five-year corporate bond return of 6.22% per year and an annual gain of 5.94% for U.S. Treasury bonds. However, with interest rates at or very near historical lows—at this time, the one-month Treasury yield is 0.15% and the five-year yield is less than 1.5%—further interest rate declines appear unlikely. If interest rates rise from current levels, intermediate and long-term bonds would suffer substantial losses. For example, if interest rates were to rise by 1%, a 20-year bond would lose about 12.5% of its value and a five-year bond would lose about 4.5%. Corporate bond defaults appear to have returned to low levels after peaking in 2008 and 2009, but yields on corporate debt are lower than they’ve been in over 40 years.

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Stanley D. Smith , Ph.D., is professor of finance at University of Central Florida, Orlando, Florida.
Gary E. Porter , Ph.D., is associate professor of finance at John Carroll University, University Heights, Ohio.
James H. Gilkeson , Ph.D., CFA, is associate professor of finance at University of Central Florida, Orlando, Florida.


John from California posted over 3 years ago:

While I realize this isn't AAII's fault ... the highest CD rates I could find after having actually received the article were around 2.6% ... roughly 25% lower than the highest rates in the article.

A search for national 5-year CD rates, sorted by APY, gives (on 18 December 2010)
EverBank 2.66%
Stonebridge 2.65
Bank of Internet 2.54
Discover 2.45
Ally 2.40
USAA 2.40
First Internet Bank of Indiana 2.40

Did the rates really fall that much in 3 months? Or am I using Bankrate wrong? Or...?

Besides being somewhat disheartened, I'm also quite confused ... as treasury rates are going up, I'd expect the deposit rates to be going up, not down, also.

What's a saver to do?

Charles Rotblut from Illinois posted over 2 years ago:

The specific CDs displayed in the tables above were compiled last fall. Look at and other personal finance websites for the latest interest rates, especially since rates change often. - Charles Rotblut

Dennis from Texas posted over 2 years ago:

The article doesn't mention the "Raise Your Rate" CD option offered by Ally Bank (and possibly others). These are 2-year CDs that allow you to increase the rate once if the bank begins offering a higher rate. I haven't used this option yet because rates have been decreasing, from 1.75 when I started a ladder to 1.41 currently, but it's a nice option to have.

James from Tennessee posted over 2 years ago:

I will read this one ( CD rates) close. I just retired July 1, 2011, and I am age 67, market seems hard to rely upon. I have a pension and soc. sec. for basis needs, and will look to IRA, 401K, and savings for new roof, home improvements, new car, trips to near or far spots, etc. I simply do not trust the market, and much of the Ameritrade funds I left in stock, were in loss positions, I hope to see them recover in year or two, or if not, sell at loss.
I do have too much in cash, but one half is earning ING 3.75% with my prior employer and the other half is in money market earning zero to 1.10% ( Discover bank) so I need to improve upon some of this NO earnings cash. I consider to move to mostly bonds, like Vanguard short term bond index mutual fund, or to vanguard inflation prot. mutual fund VIPSX, or perhaps to Vanguard retirement account for 2010, which is VTENX an option about one half stock and one half bonds. What thoughts are out there,applicable to me? send to . thanks. jdh.

Virginia from North Carolina posted over 2 years ago:

Why not buy three-month CD's, if you can afford it, so that you can take advantage of higher rates without paying a penalty?

L from Georgia posted over 2 years ago:

Thank you for an interesting and thought provoking article. Yes, the rates have come down since last fall 2010. What I found of particular interest was the potential strategy that in the event rates go up, it may be possible and lucrative to pay the penalty for early withdrawal and reinvest in a CD paying a higher interest rate (after carefully weighing all the factors of course).

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