Banks trying to push long-term CDs
Some banks are promoting longer-term certificates of deposit these days to help fund more commercial and other loans. But CD investors could develop buyers' remorse years from now if rates rise as expected. CDs allow an investor to lock in an interest rate for a specified period.
Generally, CDs are hardly havens for high returns these days. The average annual yield on a 3-year CD is 0.48 percent, and a 5-year CD is yielding little better, at 0.79 percent, according to Bankrate.com.
“And they are not heading up much at all,” said Sheyna Steiner, an investment analyst at the rate-tracking firm.
But there are a some more attractive deals out there. GE Capital Bank, for instance, has run ads recently touting a five-year CD with an annual yield of 2.0 percent, versus the 0.79 percent national average.
“People who are looking for a little better yield on CDs are more likely to find it at regional and community banks rather than the big guys,” said Joe Deaux, economic analyst at TheStreet Inc., New York.
In the Western Pennsylvania market, First National Bank has run television ads featuring a 10-year CD with a 2.05 annual percentage yield. The bank, Pittsburgh's third-largest, also is promoting the product in its roughly 250 branches in Pennsylvania, Ohio, Maryland and West Virginia.
For now, the Federal Reserve is determined to keep interest rates low to stimulate the economy. With inflation tame — rising at no more than an annual 2 percent currently and probably through 2015 — the Fed is not likely to change course soon, said Gus Faucher, an economist at PNC Financial Services Group.
But that could change in five years or so, said the economist. If rising U.S. spending pushes the government to pay higher interest on its securities to keep attracting investors, other debt issuers will feel pressure to follow suit.
“That means (banks) would need to offer higher rates as well, and that would include higher rates on CDs,” said Faucher.
The risk to investors is that they tie up their money in CDs for too long at one rate, only to find later that they could have gotten a higher rate in a few years.
Withdrawing money from a CD before it matures is not a good idea, either, because investors get penalized. The typical early-withdrawal fee on a 5-year CD, for instance, would be 90 to 120 days of interest or up to $25, said Steiner.
“I'd be leery of investing in longer-term CDs right now,” said Matt Schwartz, an attorney and retirement planner for Lange Financial Group, Squirrel Hill. “To lock into a 10-year CD just to get a 1.5 percent or so return is not a good idea if interest rates go up.”
What CDs do offer investors, however, is a safety net they won't find in the stock market. The Federal Deposit Insurance Corp. insures CDs up to $250,000 per account.
Barry Robinson, FNB executive vice president of consumer banking, said the bank's 10-year CD is one of many investments — including a range of CDs with shorter maturities — that customers seek, especially those who want the security of deposit insurance.
“CDs also help us to fund loans that in turn, help consumers and businesses prosper,” said Robinson.
FNB and many other banks have seen a rise in demand for business loans. At Sept. 30, FNB's commercial loan volumes were up 11 percent over year-ago levels, and consumer loans were up about 14 percent.
Thomas Olson is a Trib Total Media staff writer. He can be reached at 412-320-7854 or firstname.lastname@example.org.