The Return of the 6-Month CD

The Return of the 6-Month CD

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I am only in my forties, but I have been told by my seniors of an era of largely stable interest rates when 6-month CDs offered depositors the ability to earn a premium over savings or money market rates, without the burden of locking up their money for as long as a year.

Of course, it makes sense in any environment where interest rates are stable or increasing that depositors would be rewarded, albeit marginally, for locking up their money for 182 or 183 days.   However, in the post-2008 period, of course, depositors have not seen 6-month CDs that offer a premium over savings rates.   Even over the last several years when savings and money market rates have been slowing moving up as the Federal Reserve raised the Fed Funds rate from zero to 1.25%, the best 6-month CD rates have been largely below the best savings rates. 

With consensus estimates that the Federal Reserve is poised to raise interest rates 3 or 4 times in 2018, last week we finally saw the emergence of 6-month rates that are better than the best savings rates.  

As of this writing, the best online savings rate is 1.80% and the best 6-month CD is 1.95% APY.   (Local rates where you live may be higher.  Check local bank savings rates here, and local credit union savings rates here.   See local bank 6-month CD rates here and local credit union 6-month CD rates here).

We don’t believe that a 15 basis point premium over savings is worth chasing.  Over 6 months, it amounts to 7.5 basis points which after tax is about 4 basis points.  In other words, you are looking at a gain of $100 on $250,000.

Nonetheless, for many people who would otherwise consider short-term CDs, but have shied away from locking up their money for periods of 1 year or longer, the return of the 6-month CD is an interesting development. 


EverBank’s 3-Year Petrol Currency Marketsafe CD: A Different View on A Dirty Pool

EverBank’s 3-Year Petrol Currency Marketsafe CD: A Different View on A Dirty Pool

Rate information contained on this page may have changed. Please find latest cd rates.

We’ve written before, multiple times, about EverBank’s currency CD program.   We addressed these products most recently here, having first addressed them here.  

The EverBank 3-Year Petrol Currency Marketsafe CD - like the earlier EverBank products on which it is based - is not a CDs at all.   A CD is a time deposit guaranteed to compensate the depositor with a certain rate of return as consideration for keeping their money with the issuing bank for a certain period of time.  EverBank's so-called CD is an investment product designed to exploit unsuspecting people without any currency knowledge or wherewithal and to get them into a product that is more likely than not to deliver no return whatsoever over a long period of time.

When EverBank today announced this 3-Year Petrol Currency Marketsafe CD today, they produce a page with all sorts of wishy-washy rationale on why customers should be desperate to invest in a vague product involving the Canadian dollar, the Mexican peso, the Russian ruble and the Brazilian real as a way to take advantage of higher oil prices.   Beyond the wishy-washy rationale, the page and the video on the page represent a prima facie violation of the Securities and Exchange Act of 1933.

So, let’s make this simple: 

  • If you believe oil prices are going to go up, you can buy Exxon, Chevron, or another US oil company that produces a dividend. 
  • If you want to take on more risk associated with Canada, Mexico or Brazil, you can buy Canadian oil trusts, Pemex or Petrobras.   
  • If you must own Canadian dollars, Mexican pesos or Brazilian real, you can open an interest bearing foreign currency account with Citibank.
  • If you must own Russian rubles, you should get your head examined.  
  • If you want your money to be tied up with EverBank for the next three years, you should check BestCashCow’s 3-year CD rates and see how EverBank compares with others. 

Under no circumstances should you invest in EverBank's 3-Year Petrol Currency Marketsafe CD.


As Certificate of Deposit Rates Rise, So Too Does their Risk

As Certificate of Deposit Rates Rise, So Too Does their Risk

Rate information contained on this page may have changed. Please find latest cd rates.

For many years, Certificates of Deposits (CDs) have provided a relatively safe way for investors to earn a little more than the best savings rates.   For this reason, BestCashCow has always recommended that people take a look at short term CDs to protect themselves and enhance their returns in not only a falling interest rate environment, but also a stable interest rate environment.

In a rising interest rate environment – or one where the market is pricing in a rise in interest rates – CDs can rise more quickly than savings rates and therefore appear more interesting, especially when people have become accustomed to seeing low interest rates for some time.

In fact, if you look at the chart on this page entitled “Spread Between Savings Rates and 1 Year CDs” you will see that the premium offered on a 1-year CD over savings rates is now approaching 50 basis points (its widest point in a decade).

It would seem that one-year CDs are becoming more attractive. However, it is important to understand that widening premiums represent an expectation of much higher savings rates in the coming year.  The premium is widening to provide additional compensation to the purchaser for locking up their money for a full year.

But is it enough?  

This is a question for each individual to decide based on their own liquidity needs and expectations for interest rates over the coming year, but we would suggest that it might not be.  Last year, at this time, the highest online CD rates were at 1.35%.   I was a purchaser and quickly had buyer’s remorse as savings rates rose.

An additional risk to CDs as they rise that many people do not consider is the rise in early withdrawal fees.  

Early withdrawal fees, often called early termination fees, are the fees that you as a consumer need to pay in order to break a CD early should you require your capital before the end of the CD term.  These fees are always expressed in terms of months of interest on the CD and, if you withdraw early in the term of the CD, you may loose principal.  We also caution that the issuing bank virtually always retains the right to deny your right to early withdrawal (while most banks will not exercise this clause, you learn more about this risk here).

It has been BestCashCow’s opinion that a fair early withdrawal fee on a 1-year CD is 3 months’ interest and a fair early withdrawal fee on a CD longer than 1-year is 6 months’.

Without considering the risk of longer term CDs and withdrawal fees in a rising interest rate environment, let’s again just look at 1-year CDs.  A one-year CD purchased a year ago at 1.35% with a 3 month early withdrawal fee would have cost 0.3375% to exit.  On a $200,000 deposit, you would have had to pay $675 should rates rise or should you otherwise need to withdraw month early.  That same $200,000 invested in a 2% CD is going to cost you 0.50% or $1,000 to terminate early.  The risk associated with the greater penalty combined with the risk of higher interest rates might give you more pause in 2018.

So we are cautious about not just longer term CDs, but also about short term CDs here.   Anyone who is hesitant about locking in should take a look at the best online savings rates first.

Want to learn more about CDs?   We think a good starting point is with our 65 Questions to Ask Before Buying a CD.

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