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.