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Questions Raised as CD Rates Slide

By Brian O’Connell
Yields on bank certificates of deposit fell slightly last week, from 1.14% to 1.11% on six-month CDs; 1.47% from 1.51% on one-year CDs; and 2.30% from 2.31% on five-year CDs.

But what a difference a few months can make. It wasn’t so long ago, in December 2008, when CD rates were high.  Back then, rates on five-year CDs were reaching 5.25%; rates on one-year CDs were cresting at 4.50%; and six-month CD rates were around 4.00% -- there’s no doubt that investors and banking analysts will look back at those rate levels and refer to them as the “good old days.” That’s what happens when fears of a stock market crash triggers a stampede into safe havens like CDs -- sooner or later those heavenly yields come down.

But that was then and this is now. The investment dynamic has changed, as investors, including the Mom-and Pop variety, seem to no longer be sweating a stock market crash. The big question that remains is not whether investors should head for the hills, but whether or not they should return to the equity markets.

With more and more investors willing to test the stock market waters, have CD yields suffered enough? Maybe not, especially as big banks like ING (stock Quote: ING) and HSBC (stock Quote: HBC) are squeezing CD rates from the underside with high-yield savings account rates of 1.5% and 1.65%, respectively. And those rates come with no fees or no to very low minimum investments. If you can garner those kinds of yields on an FDIC-insured savings account, don’t lock yourself into a CD that really doesn’t stack up -- there’s always a chance you may need that money in the next six-months.  In addition, because demand for such safe haven investments remains strong enough, banks are in no hurry to hike up yields on CDs.

Until investors see enough stability in the stock market to warrant an ample transition of assets from CDs to equities, don’t expect much to change. There seems to be too many issues unresolved, and with corporate earning season upon us, and some scant signs that the global banking crisis may be abating, the outlook for CDs may just be a surface effect.

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