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The Honolulu Advertiser
Posted on: Thursday, May 11, 2006

CD rates attracting attention

By Russ Wiles
Arizona Republic

Certificates of deposit get about as much respect as the sweat pants in your closet: comfortable, but not very sexy.

Now, these familiar savings instruments offered by banks, credit unions and brokerages have a little more glitter, particularly if you're looking for a short-term place to park some cash.

Yields on short-term CDs have increased noticeably during the past two years, and sales are rising. At the same time, rates on long-term certificates barely have budged. This scenario has set up intriguing decisions for people pondering how much yield they should strive for, and how long to tie up their money.

"There's currently a clear bias for shorter maturities," said Greg McBride, senior financial analyst at Bankrate.com, a rate-tracking firm in Florida.

He predicts that will continue for several more months but expects long-term CD rates to push up eventually.

"I think we'll see a window of opportunity ahead for investors to lock up long-term money (at higher yields)."

Higher yields are good news for people like Ray Mariani, 73, a retiree in Peoria, Ariz.

"I have been a CD investor since I was 35 years old," Mariani said, adding that he still misses the old double-digit yields of the late 1970s and early 1980s. "I am sure we will never see those rates again."

The Federal Reserve is largely behind the shift in CD rates, at least on the short end.

Since the Fed started boosting interest rates in June 2004, 12-month CDs have increased, from 1.5 percent on average, to roughly 3.7 percent, according to bankrate.com.

During the same span, five-year certificates have gained just half a point, to 4.1 percent.

These changes reflect the reality that long-term interest rates, including those paid on CDs, are influenced less by Fed actions and more by strength in the economy, inflationary expectations and so on.

It's part of the same pattern that has seen yields surge on money-market mutual funds and stagnate on long-term bonds and bond funds.

CDs also are looking more competitive against fixed-rate annuities, despite the tax-sheltered advantages enjoyed by the latter products.

In general, though, CDs are capital-preserving instruments from which nobody's going to strike it rich. If you're lucky, yields over the long haul merely will keep you a step ahead of the corrosive impacts of inflation and taxes.

At least payouts have risen to the point where these instruments no longer are money losers. Not that everyone cares, of course. CDs are so conservative that some people pay scant attention to them, even in a rising-rate environment.