Certificates of Deposit (CDs)

A Certificate of Deposit (CD) is a time deposit issued by a bank earning a specified interest rate over the period of time you select, based on available options. CDs are issued with varying maturities and rates by institutions such as state or national banks or state or federal savings and loan institutions. Certificates of deposit require committing money to an account with a financial institution for a designated period of time and are FDIC insured.

There is such competition for your money that the best certificate of deposit rates are often available for sums as little as $500.

3-month and 6-month certificates of deposit do not offer returns that dramatically exceed those in online savings and money market accounts, money market funds and auction rate securities. Moreover, investors in states with higher state tax, such as New York and California, will ordinarily perform equally well in a three-month US Treasury Bond after they account for the fact that interest produced on the Treasury is free of state and local taxes.

1-year certificates of deposit offer a significant yield premium over shorter term CDs and many other cash equivalents, and there are small incremental gains to 2-year and 3-year CDs. Again, investors in higher tax states may find that the actual premium in these securities over state and local tax-free agency bonds or US Treasuries is small or non-existent.

We would advise investors considering longer term instruments to very carefully examine whether the premium offered over a 1-year certificate of deposit represents an appropriate time premium for tying up your money. As the yield curve remains largely flat as as we expect it to steepen, we strongly recommend against certificates of deposit longer than three years.

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