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Understanding the DepositAccounts 5-Year Online CD (5YrOCD) Index
The 5-Year Online CD (5YrOCD) Index is intended to provide a representative yield that’s available from today’s 5-year online CDs. The Index is the average yield of ten mature 5-year online CD accounts from well-established online banks. To be included in the Index, the 5-year online CD must have at least two years of history with yields that have remained competitive.
Changes in the 5YrOCD Index over the last two years are tracked and compared to the federal funds target rate and to the yields of 5-year Treasury note. Long-term CD rates are affected more by economic expectations that are often first seen in Treasury note yields than they are by the federal funds rate which is a short-term interest rate benchmark.
Recent Changes in the DepositAccounts 5-Year Online CD (5YrOCD) Index
The average 5-Year Online CD yield had a very slight decline in June, falling 0.1 bp to 0.650% on July 1, 2021. This average is based on the 5YrOCD Index which is the average yield of ten 5-year online CD accounts from well-established online banks.
The 5YrOCD Index had no change in the months of April and May. For the three months of April, May and June, the 5YrOCD Index has fallen only 0.1 bp.
In March 2020 when the coronavirus pandemic started to have a major impact on the economy, Treasury yields fell to record low levels and the federal funds rate was lowered to near zero by two emergency FOMC meetings. Banks started responding to the new environment with large reductions to CD rates.
Most online banks have been transitioning slowly to lower rates. The largest declines occurred during the first nine months of the pandemic, from March through November 2020. During this period, the 5YrOCD Index fell by more than 145 bps. Since December 2020, the 5YrOCD Index has fallen by only 4.1 bps, which suggests that 5-year online CD rates are near a bottom.
It’s interesting to note that the 5YrOCD Index (0.650%) is now close to the 1YrOCD Index (0.451%) and the Online Savings Account Index (0.451%), which indicates that savers now do not receive any significant rate premium by locking into a 5-year CD.
Although 5-year online CD yields had large declines, they have maintained a sizable yield advantage over 5-year Treasury notes. However, this yield advantage disappeared in March 2021, and now 5-year Treasury yields exceed the average online 5-year CD yield. On July 1, 2021, the 5-year Treasury yield (0.89%) exceeded the 5YrOCD Index (0.650%) by 24.0 bps. Before 2021, the 5-year Treasury yield had not exceeded the 5YrOCD Index since 2018. The 5YrOCD Index started to fall from its peak of 3.19% in January 2019. The 5-year Treasury yield started to fall from its peak of 2.96% in November 2018. This was several months before the first Fed rate cut on July 31, 2019.
During 2018 when interest rates were rising, the yields of 5-year online CDs and 5-year Treasury notes were comparable. Both increased during this time. Sometimes CD yields were higher, and sometimes Treasury yields were higher.
After these yields peaked near the end of 2018, the 5-year Treasury yields experienced much faster and larger declines than online CD yields. For example, in December 2018 the 5YrOCD Index exceeded the 5-year Treasury yield by 35 bps. By January 2019, this difference had increased to 69 bps. During 2019, the 5YrOCD Index exceeded the 5-year Treasury yield in a range of 52 bps to 116 bps. In the first half of 2020, the yield margin widened, and it was the widest on March 1, 2020 when the 5YrOCD Index exceeded the 5-year Treasury yield by 126 bps. As online 5-year CD rates fell in 2020, this lead diminished. This lead further diminished in 2021 as long-dated Treasury yields increased, and by March 1, 2021, The 5-year Treasury yield overtook the average online 5-year CD yield.
5-Year CD Rates
5 Year CD rates are among the highest CD rates in the country and offer solid returns for a fixed investment period. The table above lists the best 5-year CD rates at the top and allows you to filter your results based on investment amount and institution location. Click the plus button to the left of the bank or credit union name to view account features and rate history for the 5 Year CD, or 60 Month CD, offered by that particular institution.
5-Year CD Rate History – Average APY (%) Rate Trend over Time
What is a CD?
CD rates, or certificate of deposit rates, represent the annual percentage yield paid by a financial institution as a return on a time deposit made by a depositor. A CD is unlike a savings account in that it is issued for a fixed period of time, before which funds may be disbursed only by way of an early withdrawal penalty. CDs provide a secure way to grow retirement savings at a fixed rate of interest and can be helpful as a hedge against riskier investments in the same portfolio.
How Some People Use 5-Year CDs
Many investors use a CD calculator as a tool to help them decide whether a particular 5 Year CD is a good investment. CD laddering is a strategy used by some investors to turn the high rates achieved with longer term CDs into regular returns. To build a typical CD ladder, you would buy 5 CDs with differing maturity dates – a 1 Year CD, 2 Year CD, 3 Year CD, 4 Year CD, and 5 Year CD for example. After the first year, when the 1 Year CD expires, take the proceeds and buy another 5 Year CD with them. Repeat this process each year until you have 5 Year CDs expiring every year. This strategy helps you to take advantage of the earning potential of the higher CD rates while maintaining liquidity by giving you yearly access to funds (unless you are willing to take an early withdrawal penalty to access your money sooner).
Brokered CDs
Brokered CDs are not the same as direct CDs and come with downsides (as well as benefits) that differ from the CDs listed in the rate table above. Credit union CD rates can at times be higher than bank CD rates, and online banks tend to offer the highest interest rates among banks overall. At FDIC and NCUA-insured institutions, your deposits are covered up to $250,000, including any CDs you buy from the bank or credit union.