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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Deciding Between Short-Term and Long-Term CDs

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This CNNMoney article reminded me of an issue that many savers are facing. Bond yields continue to be very low, but there appears to be a lot of reasons why yields should soon be surging. Higher yields could result from strong economic improvement or if there are more concerns that the federal budget deficit will get further out of hand. As we learned in the last few years, it's very hard to know when we will see changes. The best example was what happened in 2011. Bill Gross who manages the world's largest bond fund guessed wrong in early 2011 when he was sure bond yields would rise before the end of 2011.

If you're a bond investor with long-term bonds, those bond prices could plummet if yields spike. Thus, you might lose a lot of your principal if you need to sell those bonds.

Savers with long-term CDs that were purchased directly from banks and credit unions don't have this exact problem. These CD holders don't have to worry about the value of their CDs if rates shoot up. However, they may still want to dump their low-yield CDs for new bank accounts that pay higher yields.

The cost of dumping a CD is the early withdrawal penalty. There are concerns about early withdrawals in an environment where interest rates are spiking. Will institutions refuse early withdrawal requests? Will they honor the original early withdrawal penalty? We have discussed these risks many times. Since there have been cases in which institutions have increased the early withdrawal penalty on existing CDs, there are legitimate concerns.

In my post on banks that give certainty about CD early withdrawals, DA reader ChrisCD provided a useful suggestion in his comment:

The biggest tip I can provide is keep abreast of rates and close your CDs early when the timing is right. I think the first "wave" of closures will probably go without a hitch. But as the banks receive more and more requests, more attention could be given, and potential refusals.

If institutions change their disclosures, regulations do require them to provide at least 30 days notice before those changes take effect. So if you keep abreast of both interest rates and your CDs, you should have a good chance at getting out of the CDs without an unexpected cost.

Also, it's a good idea not to put all of your eggs in one basket (another ChrisCD tip). Holding CDs at several institutions can reduce this risk. For example, in my opinion, it's unlikely that we will see several different institutions acting together to block CD redemptions or raise early withdrawal penalties on existing CDs.

Another example of not putting all your eggs in one basket is to not put all of your money into long-term CDs that all mature many years from now. This can be done with a CD ladder in which you will always have some of your CDs maturing in regular periods. It's a strategy that can allow you take advantage of the higher yields of long-term CDs without locking all of your money for a long period of time, and you don't have to worry about early withdrawals to take advantage of future higher rates.

Another way to get higher yields now without the risk of losing out on future rising rates is with Ally Bank's 4-year Raise Your Rate CD. If interest rates rise, you don't have to worry about an early withdrawal to take advantage of the higher rates. Ally Bank gives customers two chances to increase the CD rate to the current rate of the 4-year Raise Your Rate CD. One downside of this is that the rate of the 4-year RYR CD is a little low compared to the best 5-year CD rates (1.45% APY as of 5/3/2012). Another potential downside is that the RYR CD rate may not stay competitive in the future. If that happens, it won't be beneficial to use those rate bump options. Please refer to my Ally Bank Raise Your Rate review for more details.

No investment is without risk. CD holders who stay below deposit insurance limits don't have to worry about losing principal, but they still have to worry about losing out to inflation. If inflation rises substantially, interest rates may also rise. So savers will want to quickly take advantage of those higher rates to help offset inflation. As you can see, there are many issues to consider when deciding on CD maturities, the types of CDs and the institutions offering the CDs.


  Tags: CD rates

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Comments
17 comments.
Comment #1 by Anonymous posted on
Anonymous
What scares me is that the FED can't stop and they are going to destroy us all.......if we default on our debt or if the dollar gets replaced we are all going to get hurt..... there will be nowhere to hide if that happens.

9
Comment #2 by Apache (anonymous) posted on
Apache
Why can't the FED be stopped??  They have a board.  Bernanke does not get to force his rules all by himself without a board vote.  We did have ONE member who voted against the zero interest rates and we can hope that other members will see how this isn't working.  People aren't saving, they aren't getting the loans like the FED expected so why keep the same policy?  Changes have to be made!  It may take a new President who has the courage to do what has to be done but I can't accept the defeatest attitude I read in your post.  If WE stay apathetic we are only adding fuel to the fire!  The politicians in Washington are acting braindead, imo.  It's up to us to wake them up or vote new people in who can and will do what it takes to save our country!  You mention you are "scared".  Are you scared enough to take the time to hound your politicians with letters insisting they do their jobs?  I hope so because if this nation stays apathetic and allows a handful of citizens like myself to try to save it, your worse fears WILL come true!  

7
Comment #3 by Anonymous posted on
Anonymous
wow...one's not even allowed to voice their fears without getting a lecture anymore

9
Comment #5 by Apache (anonymous) posted on
Apache
#3  Sorry if you take my post to be a "lecture".  I take it as a plea to the poster to take action and help us do something about these problems.  So sorry you only want this to be a "fun" forum.  I, frankly, am very open to anyone who can give me ideas about how to help resolve the problems of our country, lecture or not.  Have a nice day, while you still can!

4
Comment #6 by Anonymous posted on
Anonymous
Apache: I guess it just has to be your way or the highway.  Other's can't speak of their feelings without your judgement on how they should speak or act.  I didn't mention anything about "fun" but do you really have to jump on people that just want to voice themselves.  Does every comment have to be how we can save the country?  It's a bad situation for all of us that are trying to save (and yes, I am proactive, I forwarded "our petition" to all my friends and family) but we're still allow to breath and support each other during these hard times.

6
Comment #7 by Apache (anonymous) posted on
Apache
#6  I apologize to you if I misunderstood your post.  It just didn't seem like a pro-active post and I jumped to the wrong conclusion.  I thought you were looking for answers and I was just trying to give you some.  I truly am sorry if I went overboard again and I will shackle my fingers from doing this again since I don't mean to cause bad feelings in this forum.  Luckily, the bad feelings seem to run against me so I have to pay attention to "why".  Thank you for your help in making me see that I have to take a breather concerning the problems with our country.  I also really do thank you for your help with our petition. 

2
Comment #11 by Anonymous posted on
Anonymous
#7 - No offense intended, but if you would take the time to read everyones entire post before you continually jump to a wrong conclusion and go off on the poster, you may find the need to apologize less often and actually have time to contribute some positive thoughts more often. Please try to control your anger and let others post without the fear of having to deal with your uncalled for rants. Thanks.

5
Comment #8 by Anonymous posted on
Anonymous
Apache:  I did not say the FED can't be stopped I said the FED can't stop.....there is a difference.

The FED only knows how to manipulate the rates and to print money....they are not going to stop that is the way it is.

The only way the FED can be stopped is if the bond market goes against them and if that happens we might be in more trouble than we know.

I don't have a crystal ball but I am definitely very concerned.

5
Comment #9 by Anonymous posted on
Anonymous
President Kennedy was going to shut down the FED....how did that turn out?

1
Comment #10 by Anonymous posted on
Anonymous
#9  If you are referring to Exec. Order #11110 6-4-1963, that is very scary.  Pres. Kennedy was killed shortly after that.  It was said he did want to shut down the Fed but many were against it for obvious reasons.   I will not go into more on this since my "soapbox" doesn't seem to be appreciated in this forum.  

1
Comment #13 by Anonymous posted on
Anonymous
What the hell? This was a thread about CDs and and you all blow it out into a FED Rant and SoapBox Derby.

CRIPE !

4
Comment #14 by Anonymous posted on
Anonymous
This should be a stick to the topic blog, not a GRIPEFEST.

3
Comment #16 by Anonymous posted on
Anonymous
Aren't the last several posters just as guilty of griping?

4
Comment #17 by Anonymous posted on
Anonymous
Where are all those posters who want to post about CDs??  Maybe it turns into a gripefest because no one adds anything else about CDs.  I'm open to hearing about where any one has found some decent 5 year ones other than those found by Ken.

2
Comment #18 by Paoli2 posted on
Paoli2
I can't figure out how to post a question on the Forum page so I am asking it here.  Does anyone know what something called "Structured CDs" are"?  I was just told by by local bank that their Financial Advisor has a product called Structured CDs and they bring in between 4 - 5% interest and are FDIC insured.  She said she thinks they have something to do with Bond Funds.  She is going to have the advisor call me but I would like to get your opinions or experiences with such a product.  Have you heard of them or used them for your investments since CD rates are so low?  Any information you can share will be greatly appreciated.  Thanks!

1
Comment #19 by Anonymous posted on
Anonymous
#18

type structured CD in the search box at top of page Many posts there

2
Comment #20 by Paoli2 posted on
Paoli2
#19  Thanks!  I did what you suggested and learned quite a bit.  I don't think this is for me at this time.

1