Upside of the Credit Crunch
Even healthy banks are paying more on supersafe CDs.
There's nothing wrong with a little schadenfreude these days when it comes to investing in certificates of deposit. That's because struggling banks, desperate to attract deposits, are ratcheting up CD rates, which many healthy banks feel compelled to match.
Their pain is your gain. "Consumers are getting a premium over the historical CD benchmarks," explains Scott Wallace, treasurer of Imperial Capital Bank in California.
EverBank guarantees that its CD rates will be within the top 5% of competitive yields at leading banks -- now and when you roll over a CD. Recently, it offered a five-year CD yielding 4.61%. But the top yielders were cresting 5%. Discover Bank's five-year CD was yielding 5.12% on deposits of at least $2,500. E-Loan was offering a smidgen less at 5.01% with a $10,000 deposit. You could even find one-year CDs with yields topping 4% at a handful of banks.
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Such plump yields put Treasury securities with comparable maturities to shame. One-year Treasuries were yielding just 2.19%, and five-year bonds, 3.21%. "The premium that CDs pay is more than enough to compensate for the tax advantage that Treasuries offer at the state and local level," says Greg McBride, of Bankrate.com. (You pay federal but no state or local taxes on Treasury securities, whereas CD earnings are fully taxable.)
CD rates are likely to keep rising as the economy recovers and inflation pressures mount. Set up a CD ladder, with some money maturing every six months to a year, so you can keep investing at higher rates.
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