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Insights Into What Banks Will Offer As Rates Rise

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Insights Into What Banks Will Offer As Rates Rise

In the last month there have been signs that we have finally reached the bottom in this awful interest rate environment. We have seen big gains in Treasury yields and some higher CD rates. We are not the only ones who have noticed this change. Bankers have also noticed, and they are planning their CD strategies. This article, Bankers Rethink Strategies for CDs as Rates Head Up, provides insights into these strategies. It offers some good news for savers who have been waiting for years for higher rates. However, it shows that savers should be careful before jumping on CD deals. Here’s an excerpt showing what bankers are thinking:

While they are not quite ready to run aggressive promotions, many are trying to figure out ways to lock investors into longer-term CDs now, before rates inevitably rise.

There wasn’t any talk of playing games with early withdrawals policies and penalties, but I wouldn’t be surprised if there are some bankers considering this.

Another thing I found interesting is that bankers are deciding to attract deposits with institutional CDs rather than with consumer CD promotions. One banker interviewed said “he is preparing for the loss of consumer deposits by selling longer-term CDs to institutional investors.” I wonder if this means that we’ll see better brokered CD deals as rates rise. With brokered CDs, banks don’t have to worry about early withdrawals. I’m not 100% sure about this, but I do know that if you purchase a typical brokered CD, you can’t redeem it early. Instead, you have to sell it on the secondary market (which can be for a loss if rates have risen). For a bank that issued the CD, I don’t think they would care if the CD is sold on the secondary market. They still get the same rate lock for the the same maturity date. If someone has more insights into this, please leave a comment.

I just checked Fidelity’s new offerings for brokered CDs, and there are some 10-year non-callable CDs with rates much higher than what you can get from internet banks and credit unions. As of 7/12/2013, the best rate is 3.00% 10-year CD from Goldmans Sachs Bank.

In addition to higher brokered CD rates, we should see more CD deals directly from banks. As mentioned in the article, “banks will try to entice their customers to shift money from all liquid accounts into term accounts and the longer the better." So most of the deals will likely be on long-term CDs. Should we lock into long-term CDs now? If a bank offered you a 2.50% 5-year CD right now, would you take it? How about a 2% 3-year CD? We may have to start thinking about these questions in the near future.


  Tags: CD rates

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Comments
17 Comments.
Comment #1 by Anonymous posted on
Anonymous
If I want a CD I always go for the highest rate no matter the time span for my laddered CD's.  I believe you loose waiting  for a higher rate.  As a rule  it is much harder to make up the amount you lost by investing in a lower rate waiting for a higher rate. Having a CD you will always make more than in a saving account or money market account. If rates go up you will always have a laddered CD coming due to reinvest. As you get more CD's you can have them come due every year, every 6 months, every 3 months etc. 

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Comment #2 by Anonymous posted on
Anonymous
The bottom line for savers is not a detailed descritpion of the penalty.  What actually matters is the dollar cost to the saver of whatever penalty might be incurred.  Thus, I think Ken raises an interesting question here:  Would the dollar cost of taking your penalty through sale of a CD be lower than the dollar cost of a pre-described (conventional) EW penalty for a similar CD?  I write this realizing the former penalty depends on prevailing interest rates at time of CD sale.  Still, I wonder how much "cushion" the banks build into their penalty structure.

From another perspective, I have to concede that with a brokered CD there likely always will be an exit door.  With conventional CDs, if rates rise too high too quickly, the issuing institution might close and lock that door.

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Comment #3 by Anonymous posted on
Anonymous
Pretty sure the plans have been drawn up to print until the dollar collapses, and then issue a new currency

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Comment #7 by Anonymous posted on
Anonymous
#3 "Pretty sure the plans have been drawn up to print until the dollar collapses, and then issue a new currency.

Complete history from Greek silver Drachma of 5 BCE to today's US Dollar here: 

"Historically, one national currency has played a global role- or at most, a few national currencies."

http://siteresources.worldbank.org/INTGDH/Resources/GDH-AdvanceEd-CompleteBook.pdf

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Comment #4 by Shorebreak posted on
Shorebreak
"We have seen big gains in Treasury yields and some higher CD rates."

Yes we have Ken,  but on Wednesday Fed chairman Ben Bernanke attempted to stop that increase dead in it's tracks with his vow to keep the easy-money policies going for the forseeable future. Bernanke is, to say the least, a very powerful influence on the markets and what he said reverberated globally. Bond prices rose, yields fell and share prices rose to new record highs. Some financial advisors have "been very vocal since the beginning of June that now is a great time to be adding bonds to portfolios in the belief that the recent rise in interest rates was more related to a short term liquidation cycle rather than a shift in global economic sentiment."

http://www.depositaccounts.com/forum/thread/14402-the-10year-yield-is-a-whopping-4-standard-deviations-from-its-longaverage.html

Perhaps "we have finally reached the bottom in this awful interest rate environment" but at best we may be treading water at these historical low rates for the "forseeable future". 

"Should we lock into long-term CDs now? If a bank offered you a 2.50% 5-year CD right now, would you take it? How about a 2% 3-year CD? We may have to start thinking about these questions in the near future."  Those are indeed good questions,  and could be decent yields to lock-in right now, given the circumstances after Bernanke's Wednesday back-tracking on any "tapering" talk.  Then again, it could be jumping the gun and one should keep their powder dry.

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Comment #5 by Anonymous posted on
Anonymous
I personally would not open a 5 year cd for 2.5% or 3%.... maybe 4% but not even sure about that.

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Comment #6 by Anonymous posted on
Anonymous
Previously, my IRA cd's were all brokered cd's in a Fidelity IRA account which was very simple to manage since Fidelity did most of the work opening each cd, receiving the periodic interest, collecting a maturing cd, etc. This worked very well for several years and until rates tanked. Then, in order to receive the most competetive rates, I transferred most of my Fidelity IRA to several different institutions and, as a result, my keeping track of things has increased substantially. If.and when the brokered cd's at Fidelity become competitive again, I look forward to reconsolidating my multiple IRA accounts with them

4
Comment #8 by Anonymous posted on
Anonymous
I opened a three year jumbo CD at 1.50% about a month ago and I'm probably going to regret it. With rates this low, it's simply not going to take much for medium term CD rates to jump at least 100 basis points once the economy heats up a bit more.

2
Comment #13 by Anonymous posted on
Anonymous
#8-Why didn't you get a CD that you can increase the rate???  I have one that I can increase 2 times over four years.....Why wouldn't anyone get this????

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Comment #14 by Anonymous posted on
Anonymous
#13:  Maybe it's because we don't know where these "increase your rate" CDs are?  Are you able to share which banks or cus have them?  Thanks!

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Comment #9 by pearlbrown posted on
pearlbrown
Re:  Anonymous - #2, Friday, July 12, 2013 - 7:14 AM

"From another perspective, I have to concede that with a brokered CD there likely always will be an exit door.  With conventional CDs, if rates rise too high too quickly, the issuing institution might close and lock that door."

With a brokered CD, there is always an exit door but it may open to a brick wall if there are no buyers interested in buying your CD.

With a conventional CD, the institution may close and lock that door, or allow you to exit, but make it very painful (with a high EWP) to open the door.

There are no good solutions when you access your CD funds early because of an urgent need or an opportunity to take advantage of better terms. 

7
Comment #10 by Anonymous posted on
Anonymous
Before you jump on a brokered C.D., remember that the interest earned is not reinvested back into the CD, but instead is usually transferred to a money market fund account with the brokerage firm that may possible earn as much as .01%.

5
Comment #11 by Anonymous posted on
Anonymous
Banks are NOT going to be increasing rates....it will not happen. If anything....they will drop further. You hear yesterday's comments from Fed chairman? Forget it. Wishful thinking. It's over. Rates will never go up again. NEVER.

4
Comment #12 by I hate Ft. Knox CU (anonymous) posted on
I hate Ft. Knox CU
Banks will only increase CD rates if and when they NEED your money.  They don't need your money now or anytime in the forseeable future.  They have more money now than they can safely invest, thanks to Uncle Helicoper Ben and you, the American taxpayer!

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Comment #15 by Anonymous posted on
Anonymous
@Anonymous #11 and #13:

 

It seems you don’t believe in your own words. First you adamantly state that interest rates will never go higher, and then you suggest people opt for raise-your-rate CDs.

 

Since raise-your-rate CDs usually have a lower initial interest rate than regular CDs, one has to decide if that option is worth it.

 

 

5
Comment #16 by Anonymous posted on
Anonymous
To #14 Ally Bank offers raise your rate options on their 2 and 4 year CDs.

4
Comment #17 by Anonymous posted on
Anonymous
Inova FCU also offers raise your rate type cd's for several different time periods but the initial rates are terrible at best.  And, if I am not mistaken, CIT Bank also offers similar type accounts.

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