What CD Length Should I Buy?March 13th, 2012 by Marc Prosser
- Short-Term Interest Rates Will Be Low For The Next 2 Years
- Less than 0.5% Interest Separates 2 Year CDs From 5 Year CDs
- A High Yielding 3 Year CD will provide APY in the 1.3 – 1.5% range or about a 0.25% more yield than the two year.
We believe that the 3 year high yield CDs being offered by CIT, Doral, and ALLY Bank offer the best combination of yield, while at the same time positioning investors for higher yields at maturity.
Why will yields stay low for the next two years?
Because the Federal Reserve says so. On March 13th, the Federal Reserve re-affirmed its view that it did not expect to raise the FED FUNDS rate until the end of 2014. The FED Funds Rate, the rate at which banks lend to each other overnight, is the most important interest rates in the United States, and to a large degree all short-term rates are based on it.
Why not a two year CD if rates are going to rise in 2015?
- High yielding 2 year CDs are paying between 1.0 and 1.2% interest. The 3 year gives a small but meaningful bump in the yield.
- The Fed is not going to start raising yields in one big action but in many small ones over time. Hopefully, in 2015 yields will rise by between a half to a full percent, giving investors an opportunity to re-invest their maturing CD at much higher rates.