Posted on: Wednesday, November 7, 2001

CD rates lowest ever, and going lower

By John Waggoner
USA Today

Attention, CD shoppers: Interest rates have now reached the basement.

Saving rates on bank CDs, money market mutual funds and Treasury securities were already low before the Fed cut rates by half of a percentage point yesterday. They are headed even lower.

• The average money market fund yield has plunged to 2.23 percent — a record, says iMoneyNet.com, which tracks the funds. Tax-free money funds yield just 1.60 percent on average. Money fund yields should drop another half-point as the Fed cut takes effect.

• Average 1-year CD rates are now 2.43 percent, the lowest ever, says Bankrate.com. Expect them to fall another half-point soon. "They move downhill quickly," says Daniel Ray, editor of Bankrate.com.

• The discount rate on 3-month Treasury bills hit 1.98 percent in Monday's auction, the lowest since Aug. 18, 1958. Six-month T-bills hit 1.92 percent, the lowest ever.

Some money funds now have yields lower than expense ratios — what they charge annually for running the fund.

Invesco Cash Reserves C has a 7-day yield of 0.45 percent, says iMoneyNet. Its expense ratio is 1.67 percent. Profunds Money Market yields 0.66 percent but charges investors 1.83 percent.

CD rates follow the key fed funds rate, but vary from bank to bank. Mellon Bank in Philadelphia is offering a 1-year CD yielding just 1.5 percent, says Bankrate.com. Middlesex Bank in Boston offers 3.4 percent.

For savers who live on interest, lower rates mean another tough pay cut. At the current average, a $100,000 1-year CD gives investors just $2,430 in interest income a year, vs. $5,370 at the end of 2000.

Many savings rates are below the inflation rate — 2.6 percent through September. So investors are losing money after inflation in short-term CDs and money funds.

"It's better than stuffing money into a mattress, but not much," Ray says.

Look for even lower rates by early next year. "I wouldn't be surprised to see the Fed go another quarter to half a point," says Robert Auwaerter, portfolio manager at the Vanguard Group.

Savers should look at intermediate-term corporate bond funds, he says. Yields are "better than a money fund and will give you some protection if the economy recovers and rates move up."