NEW YORK (MainStreet) — Interest rates on the 10-year U.S. Treasury note have soared above 2.8% after hitting a low of less than 2% in the spring, symbolizing a rate trend many expect to continue. So, finally, it's a good time to put money into interest-bearing products such as certificates of deposit, right?
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Well, maybe, but not to earn interest. CD rates remain pitifully low, ranging from 0.083% for the three-month CD to 0.756% for the five-year product. That means a five-year CD with $100,000 on deposit would pay just $756 a year, and the three-month CD just $83.
With inflation running around 2%, you'd be losing money on CD savings.
And if you tied your money up for five years to get the higher yield, you'd be riddled with regret if newer CDs were more generous in a year or two. That's quite possible.
There's still a case to be made for bank savings — quite a strong one, in fact. That's the benefit of FDIC insurance. You won't earn much in interest, but you won't lose money, either, except to inflation.
Other alternatives, such as stocks, even if they pay healthy dividends, all come with the risk of loss. You could beat the CD rates with a corporate bond or a mutual fund containing them and be able to get your money out with the click of a mouse. But corporate bonds lose value if interest rates rise and newer bonds are more generous. And with corporates, bond prices are also affected by the company's health. If it starts to look shaky, bond prices will fall because investors worry they won't get paid.
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With all bonds, risks get greater with longer maturities, because there's more time for bad things to happen and the consequences last longer. High-yield bonds, also called junk bonds, can pay very high yields, but only because there's a much greater risk the issuer will default and not pay investors the interest and principal owed.
So the bottom line is that when interest rates are expected to rise, it's a very tough time to invest in any type of bond, lest a drop in price wipe out all your interest earnings and more.
For now, then, bank savings, because of their guarantee against loss, are not a bad place to put money you may need on short notice. Think safety, not earnings.
Though yields are low, it does pay to shop around, because banks that find themselves short on cash often offer higher yields to lure depositors. Online banks often pay more than bricks-and-mortar banks, because their costs are lower.
If you're looking for a CD, you don't need a local bank, since your money will be tied up for the specified term, making convenience a minor issue. Be sure, though, to look at the early withdrawal penalties. Some banks are actually breaking with tradition and offering penalty-free early withdrawals. That would be nice if you have an unexpected need for cash or find a new CD or other investment that's more generous. You'll probably give up some interest earnings to get this right.
With savings and checking accounts, interest earnings are so low they don't need to be a factor in your choice of bank. Look for convenience, which these days means access to plenty of ATMs that won't charge for transactions.
--Written by Jeff Brown for MainStreet