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The Honolulu Advertiser
Posted on: Thursday, February 2, 2006

1-year CD rates nudging 5%

By Susan Tompor
Detroit Free Press

Savers aren't seeing 5 percent yields on one-year CDs yet, but some banks are getting closer to that pivotal point.

Nationwide, 11 banks offered one-year certificates of deposit with annual percentage yields of 4.8 percent or higher this week, according to a list of 100 high-yield CDs at www.bankrate .com.

A year ago, the best you could find on a one-year CD was a 3.44 percent deal through a Chicago bank.

Yields on one-year certificates of deposit haven't been this strong since July 2001, according to Greg McBride, senior financial analyst for Bankrate.com.

If you're looking to get a better rate, keep in mind that many private economists expect the Federal Reserve's policy-setting committee to raise short-term rates at least one more time, at its next meeting on March 28.

The Fed panel on Tuesday voted to boost its target for the federal funds rate to 4.5 percent. It was the 14th quarter-point move in a credit-tightening campaign that began 19 months ago.

So one-year CD rates could climb in the months ahead. But where are rates likely to be a year from now? If the U.S. economy slows later in 2006, as some economists fear, there's a risk the Fed might need to begin cutting short-term rates again. And the going rate on a one-year CD could go lower.

Strategy? Savers want to ladder their CD maturities by including some six-month CDs, too.

You want to have some money around to put into CDs a few months from now when rates might be higher.

But, at the same time, McBride notes, you don't want to be stuck trying to reinvest all your money a year from now or later, if there's a chance rates could trend lower.

Forget about five-year CDs for now.

The highest yields being offered on five-year CDs are around 4.69 percent to 4.97 percent, according to Bankrate.com. A year ago, the highest yielding five-year CD was at 4.6 percent. Go back to July 2001; the highest-yielding five-year CD was 6.05 percent.

"There's no incentive to go into that longer maturity now," McBride said.

If Wall Street bond traders become more worried about inflation, long-term rates would go up and so would yields on five-year CDs.

Consumers still will need to shop around to find higher-than-average yields.

With any CD offers, look into the fine print. Some better deals have restrictions.