Old reliable bank CDs are seeing a resurgence


KANSAS CITY, Mo. - Stodgy certificates of deposit - those decidedly unsexy, if reliable, investment vehicles - are suddenly hot.

While stocks continue to swoop and swell, CD rates have risen to some of their highest levels in five years.

"For the first time in a long time, you can cover both inflation and taxes with the rates they're offering," said Jack Dick, a 71-year-old retiree who recently put $35,000 and $30,000 into six-month CDs yielding 7.16 percent at Gold Bank of Leawood, Kan.

Nationally, the average yield on money market accounts with at least $10,000 was 4.27 percent at the end of May, according to Bankrate.com, an online service that tracks financial products. Compare that with an average 5.86 percent yield on six-month CDs, a whopping 37 percent difference.

Rates on CDs tend to take their cue from the federal funds rate, the rate banks charge other banks for overnight loans. That rate, which is set by the Federal Reserve's Open Market Committee, was increased half a point to 6.5 percent in May, the Fed's sixth interest rate increase in less than a year.

So, while the cost of borrowing money for a new home or car mortgage is likely to go up, rising interest rates also mean better deals on investment vehicles such as CDs.

With loan demand still high, financial institutions, which use your CD money to fund their loans, are eager to attract your money by paying a little more. And who knows? Maybe the CD buyer will need a checking account or cash deposit box, too.

What's the appeal of CDs? Let us count the ways:

Interest rates are locked in, even if the market declines.

Minimum deposits start as low as $500.

The money is federally insured.

Different maturities, ranging from one month to 10 years, are available.

Naturally, CDs have their downside, too. You have to pay taxes on the income. Unless you're willing to pay a hefty early withdrawal penalty - often three months of interest or more - you're stuck with your locked-in rate. So if interest rates go up, you lose out.

Of course, you can stagger your CD investments by buying short-term CDs with different maturity dates.

"I tier them for three, six and nine months," said Dick, the retired businessman. "And I include money market [accounts] in my portfolio as a base reserve."

These days, you don't have to confine your search for high-yielding CDs to your back yard. There's now a national marketplace in CDs.

If you've traded stocks online or just bought books through Amazon.com, you're probably ready to bank online. Web sites such as Gomez Advisors (www.gomez.com) rank Internet banks according to ease of use, amount of fees and other criteria.

Banks keep coming up with innovative CD products, including CDs that peg interest rates to everything from Japanese stocks to the Standard & Poor's 500 index. If the market goes up, you're in luck. If it goes down, well, at least you get your principal back at maturity.

Apart from its accounting logistics, which is the bank's problem, the CD is fairly straightforward. Invest a minimum of $1,000 and walk out the door with your interest payment in hand.

"It gives people their interest up-front, and at the end of the term, they get their principal back," said bank executive Calvin Kleinmann.

"CD buyers are typically people 55 and older who are at the point in their lives where they don't want to deal with the variability of the stock market," Kleinmann said. "They want to know their money is safe and they want a predictable income stream. That's what this is about."

But CDs aren't just for the retirement set anymore. The roiling stock market has spooked lots of folks who, in the past, wouldn't have given CDs a second look.

"We've got savers who are averse to the equity markets and people who are rolling over their 401(k) money and looking at IRAs," said Jeff Kline of CommunityAmerica Credit Union in Kansas City.

"It's pretty much across the board, demographically."

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