Good things come in small packagesSomething very unusual happened for some CD rates in June: They rose. Like rates on savings accounts and money market accounts, shorter-term CD rates were unchanged, but longer term rates ticked upward. The average rates for three-year and five-year CDs each rose by one basis point. The upturn was even more pronounced in Treasury yields, with five-year Treasuries gaining nine basis points in June. These are all small changes, but every trend has to start somewhere. Once a turning point is reached, the pace of change can accelerate. The all-time peak for five-year Treasury yields was reached in September 1981 at 15.93 percent. They fell by just over half a percent the next month, and then by more than two percent the month after that. It did not all happen in a straight line, but overall those yields continued to fall for another 30 years. The question is: Are rates finally starting to climb off the bottom after that long fall?
Managing your depositsIf this is a turning point for interest rates, here are four things that should affect your decisions about bank deposits:
- Stay short for now. As usual, the best CD rates are found in longer-term CDs, but that does not mean they are the best choice. If interest rates are indeed rising, short-term CDs, savings accounts and money market accounts will give you the most flexibility for riding rates upward.
- Keep an eye on the CD rate spread. It is no surprise that long-term CD rates are starting to rise first. Long-term instruments have to anticipate future trends, and thus are often the first to react to changing trends. Once the spread between long and short CD rates widens significantly, that would signal a good time to make the jump to longer-term CDs.
- Watch out for inflation. The recent trend is troubling, with price increases steadily accelerating. If this continues, it should also accelerate the trend toward higher interest rates, which you should factor into your decisions.
- Be ready to switch banks. Different institutions catch onto turning points at different times, so some banks will be faster to raise rates than others. That makes this an important time to monitor the market and be ready to switch banks. The idea is to be with one that is leading the way toward higher rates -- not one that is trailing behind.