Banks beginning to bump up their CD rates

May 04, 2008|By Jane J. Kim | Jane J. Kim,The Wall Street Journal

The tide might be turning for savers, as long-languishing CD rates start ticking up.

Since the Federal Reserve started cutting its short-term interest-rate target last fall, yields across certificates of deposit, savings accounts and money-market accounts have plummeted. But, in recent weeks, several banks, including Wachovia Corp., KeyCorp's KeyDirect unit and M&T Bank Corp., have bumped up rates on some of their longer-term CDs. The changes partly reflect the rise in longer-term Treasury yields this month and investors' expectations for higher inflation.

Indeed, rates on deposit accounts might be close to bottoming out. The Fed, which cut rates by another quarter of a percentage point Wednesday, signaled it might pause in its rate-cutting campaign.

Some banks are already responding. While average CD rates were relatively flat in April, a handful of banks offering high-yield CDs - such as Capital One Financial Corp., Advanta Corp.'s Advanta Bank and E(1)Trade Financial Corp. - have recently bumped up yields on some of their CDs stretching out three to five years.

The moves are consistent with the rise in Treasury yields in recent weeks, the absence of further bad news from the credit markets and rising concerns over inflation, says Greg McBride, a senior financial analyst at Bankrate.com. The yield on the five-year Treasury, for example, jumped last week to 3.1 percent from about 2.6 percent since the beginning of April.

"Everyone's expectation of inflation in the future is increasing," says Larry Fuschino, a senior vice president at Wachovia. "What that does is make customers feel like they want higher rates for longer terms." Last month, for example, Wachovia boosted the yield on a 60-month CD to 4.75 percent from 4.25 percent - a rate it had been offering since mid-February. Before that, the rate had been at 2.8 percent.

KeyDirect recently raised rates on its longer-term CDs by 0.25 percentage point to 4.75 percent and 5 percent for its 60- and 84-month CDs, respectively. GMAC Bank LLC raised the rates two weeks ago on its four- and five-year CDs to 4.35 percent from 4 percent and 4.15 percent, respectively. Bank of America Corp. has also increased rates on a variety of CDs stretching out as many as 47 months.

Some banks are also raising some of their short-term CD rates. Last month, for example, ING Groep NV's ING Direct raised the rates on its six-, nine- and 12-month CDs to 3.3 percent, from 2.75 percent, 2.5 percent and 2.5 percent, respectively. Meanwhile, IndyMac Bancorp Inc.'s banking unit is offering special one-year CDs online with a yield of 4.15 percent.

The higher rates are attracting the attention of some savers. Patrick Spangler of Pleasanton, Calif., is considering a 20-year FDIC-insured CD yielding 6 percent, which is callable after one year, through Charles Schwab Corp., his brokerage firm. "I'm interested in the highest rate I can get," says the retired nuclear engineer, who looks for yields ranging from 5 percent to 6 percent. "I'm 70, and we're looking for income," he says, referring to himself and his wife.

Callable CDs, which are often sold by brokerage firms, typically promise higher interest rates than traditional CDs because the financial institution can return the money after the callable date if prevailing rates decline. That, in turn, could leave savers scrambling to reinvest the funds at a good rate.

Although Spangler is betting that interest rates will stay low, he admits that if there is rampant inflation and interest rates soar, he'll be stuck at 6 percent. If interest rates drop, he expects the financial institution issuing the CD will call it early and return his funds. Still, he's willing to take that risk, because he'll be earning 6 percent for at least a year. "There's risk in everything," he says.

For the banks, a steepening yield curve - when longer-term rates are higher than short-term rates - makes it easier for them to offer higher rates on longer-term CDs. That's a sharp contrast with a year ago, when the yield curve was relatively flat or inverted. That meant savers were earning about the same, or even more, to hold money in shorter-term instruments as in longer-term ones.

By another measure, the difference in yields between five-year CDs and five-year Treasurys has widened in recent weeks to about 1 1/2 percentage points, says Bill Vulpis, managing director of investment product management at TD Ameritrade Holding Corp. Typically, that difference has ranged from 0.35 to 0.45 of a percentage point, he says. The wider spread partly reflects banks' need to raise deposits, and the flight to Treasurys, which has driven down yields, Vulpis says.

But then, savers who lock in longer-term CDs run the risk of missing out on higher yields if interest rates rise.

Eleanor Laise contributed to this article.

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