Shorter Term Certificate of Deposit (CD) Rates are the Best Deals These Days

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My colleagues and I have been recommending staying invested in shorter term certificate of deposits so you are in a position to take advantage of higher CD rates when rates finally do move higher. The second reason to stay invested in short term certificates of deposit is the CD rate curve is flat, meaning the difference in CD rates for the shortest term and longest term certificates of deposit is minimal.

For example, the best CD rates on our 3 month certificate of deposit rate list are at 0.65 percent from E-Loan.com. The highest CD rates in our 6 month certificate of deposit rate database are only .25 basis points higher at 0.90 percent.



Comparing average CD rates at banks in the FDIC's National Rate and Rate Cap Survey, the spread is even narrower. Current 3 month bank CD rates are averaging 0.09 percent and 6 month CD rates are averaging 0.15 percent.

The interest rate spread on longer term certificates of deposit isn't much better. The FDIC's national average 12 month CD rate is at 0.23 percent, only only 8 basis points higher than the average 6 month rate.

Comparing the rate spread difference on the highest CD rates available for 1 year certificates of deposit at 1.04 percent we see the best rate is only 14 basis points higher than the best 6 month rate. Going out longer on the rate curve the spreads get even narrower. The best CD rates on 18 month certificates of deposit right now are at 1.06 percent, only 2 basis points better than the best 12 month rate.

Moving onto 24 month CD interest rates we see the highest rate is at 1.19 percent, 15 basis points better than the highest 12 month rate. As you can see you won't get much of a higher return investing in longer term certificates of deposit. Even if you move out to 5 year CD rates the best rate is less than 100 basis points higher than the best 1 year rate. Right now the best 5 year CD rate on our list is at 1.78 percent, only 74 basis points better than the best 1 year rate.

As the economy picks up momentum and inflation becomes a concern the Federal Reserve will start increasing the discount rate and federal funds rate. When the Fed increases these rates banks will start increasing interest rates on certificates of deposit, saving accounts and money market accounts. The Fed is expected to keep these rates low until mid-2015 but might increase these rates sooner if the economy picks up steam.

A series of positive economic news from housing to retail sales has pointed towards an economy that is getting stronger. The last factor holding back growth is Washington. When a deal on the debt ceiling limit and the budget is worked out many economists believe the economy is poised to take off. When that happens interest rates on interest bearing investments will start moving higher. Since rates are so low right now we believe rates will move sharply higher, that being said staying invested in shorter term CD accounts positions you to move when CD rates increase.
 
Author: Jason P. Jones
January 6th, 2013