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Value of Short-Term Certificates of Deposit?


One thing that has surprised me over the years is the popularity of short-term CDs. Several of my friends and colleagues would never consider CDs with maturities over one year. The 6-month term was often the most popular. It appears my friends weren't unusual. I reviewed call report data from the NCUA for two large credit unions, and the data shows more deposits in short-term CDs than long-term CDs.

You can review call report data from all the credit unions at the NCUA Find a Credit Union tool. This data includes the amount of deposits held in share certificates (CD) with maturities under 1 year, from 1 to 3 years and over 3 years. I reviewed the deposit data of two large credit unions: Navy Federal Credit Union and Pentagon Federal Credit Union (PenFed).

Both Navy Fed and PenFed have a long history of offering very competitive long-term CD rates. Their short-term CD rates have been fair, but rarely have they been near the rate leaders. So one would expect that most money would be in the long-term CDs. This is not the case.

For Navy Fed, $5.1 billion (54 percent) of the CD deposits were in terms under one year, $2.6 billion (27 percent) were in terms from 1 to 3 years, and only $1.8 billion (19 percent) were in terms over 3 years. I've graphed these numbers in the following pie chart.

Navy Federal Credit Union Share Certificate Term Distribution

Not only does PenFed have a history of very competitive long-term CDs, it has also made it easy for anyone to join. So it would be reasonable to expect that long-term CDs would be the most popular. However, mid-term CDs (terms from 1 to 3 years) actually hold the most money with $2.4 billion in deposits (44 percent). Short-term CDs with terms under one year hold $1.8 billion (32 percent). Long-term CDs hold the least amount of money with $1.3 billion in deposits (23 percent). The pie graph below shows the distribution:

Pentagon Federal Credit Union Share Certificate Term Distribution

Short-Term CDs vs Savings Accounts

It's surprising to see the popularity of short-term CDs. In my opinion, it makes more sense to keep your money in savings or money market accounts instead of short-term CDs with terms under one year. You might earn a little more in interest with short-term CDs than in a savings account, but the slightly higher interest rate doesn't make up for the reduced liquidity.

As an example of how little benefit 6-month CDs provide over savings accounts, I reviewed the savings account and 6-month CD rates at Ally Bank over the last year. A year ago, Ally Savings Account yield was 1.09% and Ally's 6-month CD yield was 1.04%. Six months later Ally Savings Account yield had fallen to 1.04% and new 6-month CD yields had fallen to 0.99%. Today, the savings account yield is 0.84%. I estimated that the average yield over the last year for Ally Savings account is about 1.00%. The average for two 6-month CDs is 1.02%. The 6-month CDs may provide a little higher average rate than the savings account, but I wouldn't consider this high enough to make up for the reduced liquidity.

The liquidity feature of savings accounts may not be too important if you don't need the money for a while. However, it can be important if you want to take advantage of a good CD deal that pops up. The CD deal may end before your 6-month CD matures, and if you break the CD early, you'll be hit with an early withdrawal penalty. In addition, it can take a while to close the CD and move the funds into a liquid account. Even with an internet bank where you also hold a liquid account, it can take take some time. For example, when I closed Ally Bank's no-penalty CD, it took two business days before the money was transferred to my Ally savings account.

Short-Term CDs vs Long-Term CDs

If you want to maximize interest rates on the money that you want to keep safe, short-term CDs don't provide much value. Savings accounts are better choices especially at internet banks. To maximize interest rates, long-term CDs make more sense than short-term CDs. If you're concerned about having too much money locked into long-term CDs, using CD ladders and choosing CDs with mild early withdrawal penalties can help.

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Anonymous   |     |   Comment #1
Here's my question.  When interest rates start to rise again, will banks/credit unions refuse to let one close their CD?  They would make much more money by refusing, than letting a customer pay a penalty and get a CD at a significantly higher rate.  Some banks/credit unions are already raising the early closure penalty rate for existing CDs, so what will prevent them from refusing to release the money until the maturity date???
Dave   |     |   Comment #2
RE: Anonymous #1, I'm a CFP here in Iowa for 19 years.  I've had some small community banks here refuse Early Withdrawals for my clients over the years.  We looked into it, and legally they can do so.  I see no reason why larger banks, if it suits them, cannot do the same.  That's why it surprises me that this website devotes a lot of space re: the strategies for taking EWP's.  In all due respect (and I love this website and recommend it to all my clients!), I think that to depend on EWP's being available, with the terms that are in place at a given time, is a mistake.  As i said, we looked into it for our clients, and by state law here, banks can modify or eliminate EW's.  It is not considered a contract.  
Anonymous   |     |   Comment #3
Here in N. Carolina, EW provisions re: CD accts. are also not considered contractual, but rather "business practices" that can be changed at will by the bank as long as they 'clearly communicate' the change and apply it in a 'consistent manner.' i.e., the same way to all depositors.  Can't depend on them really in this state.  I've been in banking here in NC for 34 yrs., just telling it the way it is. 
Anonymous   |     |   Comment #4
First thing I would say is that interest rates are not going to go up again.....ever. So forget it. There is absolutely no way they can. The ONLY way the government can come close to surviving the debt is through low interest rates and inflation. It is now policy.....and will not change even if communist Obama loses election.......So may as well do a long term CD. Ally has a very low penalty. Just be careful.....most banks dont even have to give you your money prior to maturity. Check the small print.....many say "at the bank's discretion"......Also......I treat the Ally no penalty CD as a money market. You can get your money anytime and just open another one . Didnt take 2 days when I closed mine....took 1 day. Easy.
Anonymous   |     |   Comment #5
HA HA HA!!!!!!!!  Anonymous #1 said "when interest rates go up again"!!!!! HILARIOUS!!  I didn't know we had a resident comedien on this board. Anon #4 is 100% right......rates aint going up's over folks. And you better understand that real quick.  Rates go up and the debt becomes untenable....and that ends life as we know it.
lou   |     |   Comment #6
Talk to the citizens of Greece, Italy, Spain, Ireland, France and Portugal and tell me if interest rates can never go up again. This sounds like the talk I use to hear a number of years ago about how home prices could never go down. We all saw how that turned out.
Greg   |     |   Comment #7
Another thoughtful post by Ken.  Some of the responses are, in my view, hyperbolic.  I can't say about the laws in North Carolina and Iowa, but in New York, CD terms and conditions are indeed contractual and cannot be changed at the whim of the instititution, under the flimsy banner of "business practices."  

As Ken (and others) have pointed out, the devil is in the details.  Some banks and CUs are explicit about restrictions on early withdrawals (allowed only in their discretion).  Others allow EWs on liberal terms, but have general amendment terms that put the policy in some doubt (particularly in view of the ill-considered NCUA letter ruling on Fort Knox CU). 

As for those confidently predicting that interest rates will absolutely, positively never go up again, what are you doing wasting your time nickel-and-diming with CDs?  Put all your money into writing interest rate futures contracts on Globex, reaping in the big bucks from gullible hedge funds seeking protection from rising interest rates.  What could possibly go wrong?  ;-)
Anonymous   |     |   Comment #8
I'm completely surprised as to the ratio of short term CD's vs the longer term CD's....would have thought that the % of long term CD's would have been much higher. As for me, I simply can not live off the yield on the short term CD's and have no reasonable choice other than to go with the 5 and 6 year ones....and have wrongly assumed that most others did also. Maybe a more reasonable balance would at least to go fot the raise your rate type of CD's or some form of step-up-in rate type CD's.
Anonymous   |     |   Comment #9
I simply adore anything short term.  Just ask my last 3 husbands :)

Seriously, I prefer short term CD's in this interest rate environment.   Suze Orman's January newsletter says there is a 50% chance of stagflation in the next year (I think I remember the timing correctly).

I don't want to be all tied up if we go into rising rates.   And I hate ladders.  I've always been fearful of them..
Anonymous   |     |   Comment #13
#9:  What is scary about ladders? I am on a 6 year ladder right now and it is fine. I have 2 or 3 coming out every year if it weren't for me laddering i wouldn't still have 5.5% to 6% cds left. I believe rates will be rising and sometimes the FED has nothing to say about that but if that happens things could get ugly.
rosie43   |     |   Comment #10
Again I am in the minority, I always go for the highest rate no matter how long the term. Has worked for 50 years for me.
Anonymous   |     |   Comment #11
Ken, are you sure that the statistics you are using reflect the original terms of the CDs as opposed to the remaining terms of the CDs?  In other words, if Pentagon Federal issued a 5-year CD four  years ago, would that be shown in the current statistics as a 5-year CD or a 1-year CD?
Anonymous   |     |   Comment #12
Interest rates will never go up again!

The economic cycle has been repealed!  It's all different this time!

Yup.  In the late 1990s, we saw people giving elaborate explanations about why the stock market will go up 25% every year.  In the mid-2000s, we saw long articles explaining that real estate MUST go up 20% every year from now on.  We were assured that it was all different now.  The old rules no longer applied.

But this time it really, really is different, right?
Anonymous   |     |   Comment #14
Suzie Orman can teach you the basics but I wouldn't do whatever she said. I think most of the stuff she talks about is common knowledge except for that Denied or Approved segment she does, that cracks me up. I can't believe people are that clueless when it comes to their finances.
Anonymous   |     |   Comment #15
The EWP is covered by the federal truth-in-savings act. It's an attribute that must be disclosed when opening an account, and like the other attributes can be changed with 30 days notice. That's Alliant CU's take on the regs. Though IMO being provide an avenue for change doesn't imply a unilateral right to change, esp if not reserved in the agreement (which Alliant doesn't do--they only mention the clause in the deposit agreement). Anyway, the stock markets and bonds are for long term savings, not a bank.
Sidney   |     |   Comment #16
I love these "Absolutists" saying that interest rates will never go up again.  Every reasonable person will know that they are wrong.  It's just a question of "when?".  We are in a very very long cycle, but it IS a cycle.  Eventually, the govt. will recognize inflation (we have it now, but it is not being recognized) and rates will go up.  This cycle of course has badly hurt savers.  Real estate will go up again also, also a very long cycle.  I think that all this is "Common Sense," but I will say that I am chairman of the Economics Dept. of a medium-sized college in central Minnesota. By the way, yes, most banks can change EWP's on their CD's and I wouldn't be surprised if they elect to do so when rates rise.  It would be bad public relations, but some will do it.
lou   |     |   Comment #17
Sydney, someday the bond vigilantes will have their way and drive up long term rates regardless of the Fed's aility to print money and purchase govt securities. Just like most of the European countries, at the rate we are going it is just a matter of time before investors lose faith in govt securities and demand much higher rates to compensate them for the increasing risk. Our public debt and sky-high deficits will eventually come home to roost in the form of higher rates. The only question is when it will happen not if it will happen.
Shorebreak   |     |   Comment #18
In the end, no one knows for sure what the future for interest rates holds. All it would take is for some serious incident, nationally or internationally, to raise rates overnight. Of course, I believe the odds of this happening are rather slim at the moment. One should ultimately put their funds into investments they are comfortable with. If it's a laddered certificate of deposit portfolio, more power to you. That has been a reliable strategy for most savers, and barring this dry patch, may well prove to be the old reliable tortoise in this race.
joe   |     |   Comment #19
I just ladder the cds, been doing it since early 2000.  So those penfed 6.25% cds in 2007 were really a good deal.  Luckily I have a good paying job, so at the worst, if the rates go up, I'll still buy the highest yielding cds.  At some point the cds will mature and I will be able to get the money no matter if the bank accepts or not accepts the early withdrawal with the penalty.  The system is rigged and I fully realize it.  If the rates do go up, it will be interseting to see what banks like penfed do.
Truthseeker   |     |   Comment #20
If a bank or credit union can change the early withdrawal penalties at will, and we've already seen the federal government back them up on this, they can also change the term of the CD, under the unilateral changes clause of the CD "contract".  No one should put money in CDs under such conditions of financial repression.  You may buy one at 2% interest for 5 years, and find out, in 5 years, that the bank has changed the term forcing you to allow them to keep your money for 10 or 15 years at the same low rates.

As for rates "never" going up...that is just foolishness.  Rates won't be allowed to rise for many years, at least 5 years, but maybe 8-10 years.  During that time, the central bankers are going to induce heavy inflation, while buying bonds to artificially reduce rates on savings and bond investment.  Once we experience the 20-30% per annum inflation, and the debt burden is brought down to, perhaps, 1/4 of what it is now, they will reverse gears, as they did after the Great Inflation of the 1970s, and raise rates dramatically.  We don't know when it is going to happen, or how fast they are going to debase paper currency, and that is why investing in CDs or bonds is so foolish.

Buy platinum, or even gold or silver.  That is the best alternative to CDs, especially when the price takes a big dip, like now.  Or, if you need money currently, buy high dividend stocks likely to maintain their dividends in a highly inflationary environment.  Some will object to this as too "risky" for them.  While it is true that no risk is attached to bonds and CD investments, that is only because the outcome is a certainty.  You will find your savings wiped out by inflation.

That said, this is a great site to find good liquid savings accounts in which you can hold your ever deeply debasing paper money, for short periods of time, while you decide how to invest it in real assets.
Anonymous   |     |   Comment #21
So in [1] the Truth-In-savings says that if an adverse change is made then account holders shall be noticed by mail 30 days in advance, which Alliant CU [2] tries to pervert the consumer protection into a claim that the law allows them to make changes.  If so, then there's a long list of things [3] that can be changed.

[1]: 12 U.S.C. § 4305

(c) Distribution of notice of certain changes
If -
(1) any change is made in any term or condition which is required to be disclosed in the schedule required under section 4303(a) of this title with respect to any account; and
(2) the change may reduce the yield or adversely affect any holder of the account,
all account holders who may be affected by such change shall be notified and provided with a description of the change by mail at least 30 days before the change takes effect.


page 6:

"All accounts described in this Truth-In-Savings Disclosure are share accounts. The Truth-in-Savings Act allows for the change in terms of share accounts as long as 30 day advance notice is given."

[3]: 12 U.S.C. § 4303

"all fees, periodic service charges, and penalties which may be charged or assessed against the account"
"Any annual percentage yield."
"The period during which any such annual percentage yield will be in effect."
"any minimum time requirement which must be met in order to obtain the yields"
"Any provision or requirement relating to nonpayment of interest, including any charge or penalty for early withdrawal, and the conditions under which any such charge or penalty may be assessed."
Anonymous   |     |   Comment #22
Lots of geniuses here but, truth be known, they have no more of a clue than the rest of us poor souls. Rates up?, down?, static?, who knows......its a crap shoot and right place, right time rules.
Anonymous   |     |   Comment #23
Other options in lieu of raising rates: haircuts, defaults, currency devaulation, new currency.  In those instances, rates could remain low, and you lose principal.  Best of both worlds.
Anonymous   |     |   Comment #24
Has Alliant retroactively changed anything?
Anonymous   |     |   Comment #25
Alliant hasn't changed any CD terms yet, but the point is an apparent mindset that any bank or CU can change many aspects of an account with 30 days notice. No need to reserve or state ability to change in an account agreement for a right afforded by law, and this federal law would trump any state-specific protection that some here think they have.
Anonymous   |     |   Comment #26
The only problem here that I see is self made.

Too many people are looking at CDs as financial trading vehicles rather than a savings vehicle of which CDs were original intended.  Don't blame the banks and credit unions for changing the terms and conditions of their CDs to meet the changing attitude of many CD holders.
Anonymous   |     |   Comment #27
#26 - You may be right with respect to new CD's issued on and after such and such a certain date, but to change the terms on previously issued CD's is just plain wrong.
Anonymous   |     |   Comment #28
I was on the phone calling out of town banks for CD rates and EWPs and just got sick to my stomach!  One of the banks was giving a bit over 1% and said the EWP is 2 and one half years of interest earned or unearned!!!  Have we all died and gone to CD Hell??  I just put in a question from an email I just got about sending a question to Obama after his State of the Hell Event.  I asked why "no one" was mentioning what has happened to the elderly's savings and with these drastic low interest rate and what is going to happen to the young who may want to save.  I doubt if it will be selected because they don't want to give us the real answer.  But I would love to hear them explain to the nation what they are allowing to happen to us and WHY!!  I cannot believe it has to be "this" bad!
Fred   |     |   Comment #29
RE Anonymous #28 and others:  I'm 65 years old and still working full-time.  I recently asked my financial planner how much we need to retire.  He said, "Don't retire.  At these rates, you can't."   How much does one need at 1%-2% to retire comfortably?  And don't tell me about stocks -- one bad day on Wall Street about "Greece" can wipe out any % benefit to be in stocks.  I'm glad that I'm healthy and can work, but I'd like to stop at some point before I'm 80. 
Anonymous   |     |   Comment #30
Fred:  How blessed you are that you have a "choice" in being able to continue to work.  My partner was put out to pasture with many others in the company he worked for when he was in his late 50's.  He could never find another job!  He did not want to retire and it threw our finances into a Hell hole!  I went to work for a couple of years to help out but ended up sick so that ended that!  I have to laugh when I read all this stuff about telling people they need to work into their 70's or longer.  What a joke!  My partner's company made sure they got rid of all the people in their 50's so they could not even get their full pensions at 65!  Yep!  Be sure to work as long as you can if you can find a company who will keep you!
Greg   |     |   Comment #31
Anonymous [21] has it right.  12 U.S.C. § 4305 is a consumer protection provision, not a license for an institution to breach a contract that benefits consumers.  It says that if an institution wants to makee one of the enumerated changes, it must give sufficient notice.  It nowhere says or implies that the institution is thereby cloaked with the right to change each and every term, in its discretion.

One must read the fine print caredully.  Each bank and CU does it differently.  But if you choose an institution that unequivocally allows early withdrawals; has a liberal EWD penalty; and does not reserve the right to amend, I'd venture to say that very few judges, juries or arbitrators would say that the institution could unilaterally alter that contract.  After all, as others have noted, under that rationale, the institution could take a customer's 5 year 2.3% CD; give the consumer a 30 day notice that the CD was now 0% and 20 years.  The EWD penalty is as much a material part of the deal as the term and rate.

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