Wednesday, July 13, 2016

CD Rates Falling, But Yield Premiums Still Attractive

Rates on several 5-year CDs I've been monitoring have fallen in recent weeks, but good CD (Certificate of Deposit) deals still are available, and the yield premiums of good CDs over Treasuries of the same maturities still are attractive. Ally Bank recently dropped its 5-year CD rate from 2.00% to 1.75% APY (1.70% if less than $25,000), and more recently Barclays Bank dropped its 5-year CD rate from 2.05% to 1.75%. The rate on the Synchrony Bank 5-year CD still is relatively attractive at 2.05% (2.00% if less than $25,000), but Synchrony recently increased the early withdrawal penalty (EWP) on its 5-year CDs from 180 days of interest to 365 days of interest, so even this CD is somewhat less attractive than it was before this change.

It's not particularly surprising that 5-year CD rates have been generally declining, since 5-year Treasury rates have been generally declining this year, from a fairly-recent high of 1.80% on December 29, 2015 to a more-recent low of 0.94% on July 5, 2016. So even at 1.75%, a 5-year CD purchased directly from a bank or credit union ("direct CD") with an EWP of 180 days of interest is a good deal compared to the recent 5-year Treasury yield of about 1%. That's a yield premium of about 0.75 percentage points (75 basis points).

Of the three CDs mentioned above, the Synchrony Bank 5-year CD with a rate of 2.05% provides a yield premium over the 5-year Treasury of about 1 percentage point (100 basis points), or to put it another way, the yield is about twice that of a 5-year Treasury. So even with the higher EWP compared to a few months ago, this CD is pretty attractive.

Coupled with the early withdrawal option of a direct CD, which significantly decreases the risk of losing money if interest rates increase (interest-rate risk, also referred to as term risk), the much higher yields on good direct CDs make them an extremely attractive fixed-income option for individual investors who can take advantage of FDIC deposit insurance (for banks) or NCUA deposit insurance (for credit unions). Institutional investors with millions or billions to invest cannot take advantage of this federal deposit insurance due to insurance limits in the hundreds of thousands of dollars, and thus must be content with Treasury rates if they do not want to take credit risk (the risk of a bond not paying its interest, and possibly not paying back some or all of the original investment as well). The inability of large, institutional investors to take advantage of the federal deposit insurance is one reason these attractive rates remain available to smaller investors.

Even better CD deals are available if you're willing to join a credit union. I recently purchased a 7-year IRA CD with an APY of 3.00% and an early withdrawal penalty (EWP) of 180 days of interest from Andrews Federal Credit Union, using a custodian-to-custodian transfer of the proceeds from an Ally Bank IRA CD that matured a couple of months ago. I am in the process of doing another such transfer from the proceeds of an Ally Bank IRA CD that matured yesterday.

With the yield on a 7-year Treasury at 1.35% yesterday, a 7-year CD at 3% provides a yield premium of 1.65 percentage points (165 basis points). That's pretty outstanding. My average yield premium for CDs purchased in the last 5.5 years or so is about 115 basis points, and my average premium for CDs I still have open is about 130 basis points. Adding another CD with a premium of 165 basis points will nudge that average higher.

For non-IRA accounts, a couple of credit unions to look at for good 5-year CD deals are Mountain America Credit Union (MACU) and Northwest Federal Credit Union (NWFCU), both of which I am already a member of, having become a member to purchase attractive CDs previously. Yield on the MACU 5-year CD currently is 2.30% APY, and according to the following blog post at DepositAccounts, you can earn as much as 2.47% on the 5-year CD at NWFCU: Northwest FCU Offers Bonus Rate On Share Certificates.

With the latter, be careful about exceeding the NCUA insurance limit of $250K in an IRA, since the minimum deposit to earn the 2.47% rate on this CD is $250K. In an IRA, your principal would be insured, but your interest would not be insured if you reinvested your interest in the CD or in any other IRA account at MACU (since your IRA account value would then exceed the $250K limit). There are a number of ways to get more than $250K of NCUA insurance in a taxable (non-IRA) account using different ownership categories. For example, a joint account for spouses is insured up to $500K, and using a trust or payable on death (POD) account, you are insured up to $250K per beneficiary up to five beneficiaries (and even more, but the rules are more complicated for more than five beneficiaries).

So the great CD deals are becoming fewer, but they're still out there, and even the OK CD deals are a good deal compared to marketable securities with no credit risk (i.e., Treasuries). Assuming an efficient bond market, and I believe that the bond market is quite efficient, CDs being a good deal compared to Treasuries on a pure yield basis make them a good deal to any bonds or bond funds on a risk-adjusted basis, since in an efficient market, higher yield means proportionally higher risk. For more thoughts on the superiority of the risk-adjusted yields of direct CDs, read my 3-part blog series on the 5-year returns of CDs compared to other fixed-income investments:


  1. Yet another enjoyable read on CD's from you, Kevin!

  2. Great list! Do you have to live near a MACU branch in order to become a member?

    1. No. I published a blog post about my experience joining MACU in 2013, which you can easily find by using the search box here, or by doing a Google search like this: MACU I have joined many credit unions to buy CDs, and have never visited a branch office.

      The Andrews FCU 7-year CD at 3% is a better deal, so I'd go for that one over the MACU 5-year CD at 2.3%, but either one is a great deal.

  3. Nice to hear from you again, Kevin.....Followed you over here from a conversation you were in on Boglehead website.....

    So here's a related question....Is there any way to invest in any of these CD's you're mentioning with money that is "trapped" in a 401k Account like Fidelity, etc....

    It appears that the only CD's you can tap from Fidelity, for instance, are "brokered" CD's.....More specifically, is there any way to do a non-penalty creating transfer from a Fidelity 401K account to Andrews credit union that would enable you to buy their IRA-CD?

    1. Unfortunately, you cannot buy "direct" CDs in a 401k, since you are limited to the funds offered by the 401k administrator, or to what you can buy through the brokerage option if there is one. So brokered CDs are the only possible option in a 401k, which rules out the Andrews FCU IRA CD.

      If you are retired you can do a rollover from your 401k to an IRA, which would be a way to buy the Andrews FCU IRA CD.

  4. Hi Kevin - Nice article. As a possible addendum, do you know of a place where you can find early withdrawal penalties published alongside rates for 5 year CD's?
    I know "" is a great source for rates, but as far as I know, you then need to go through the exercise of calling each bank or credit union to figure out the EWP...?

    Thanks in advance for whatever insights you might be able to pass along....

    All the best,


    1. Sometimes the EWP will be mentioned in an article about the CD on Sometimes you can find it in a disclosure document on the bank or credit union website. Sometimes they're hard to find, but just look for links for disclosures or terms and conditions, open up whatever you find, and search for "early withdrawal" in the document. Some banks and credit unions don't make these easily available, and sometimes only in a document you'll receive after you buy the CD, in which case calling is the only way to find out beforehand.

  5. Hi Kevin --

    Interested in your thoughts about what interest rates will do next since the Trump election....

    Will our $20T in debt force the powers that be to keep rates low to avoid higher interest payments on all that debt....

    Or will the inflation that inevitably comes along for the ride with Trump's heavy growth plans force rates to go higher....?

    In other words, is it better to stay in CD's for a while longer....or is it time to shift more to bonds given the recent rapid rise in rates?

    1. The evidence I've seen indicates that no one is good at predicting interest rates, even those who are considered experts, so I don't put any effort into trying to do so. I just hedge against rising interest rates with direct CDs; the early withdrawal option provides the hedge.

      In addition to the EW option, the higher yield compared to Treasuries also provides a nice buffer against rising rates. My average yield over Treasuries of same maturities for CDs bought in the last six years is more than 100 basis points (so 5-year CD at 2.5% if 5-year Treasury yield is 1.5%).

      The recent increase in rates hasn't been that big--certainly nowhere near enough to tempt me to increase my allocation to bonds. The CD yield premium is smaller after the increase in Treasury yields, but it's still quite attractive for the best CDs.

      The 5-year Treasury yield is 1.83% as I write. The APY of the Achieva Credit Union 5-year IRA CD I just bought was 2.71%, so a premium of 88 basis points--not bad. The 7-year Treasury yield is 2.17% and Andrews FCU has a special going on for a taxable 7-year CD at 3% (I already picked up three of the IRA CDs at this rate), so a yield premium of 83 bps. These still are very nice premiums, especially when you factor in the low early withdrawal penalty of six months of interest on these CDs.

      A run of the mill 5-year CD at 1.75% is not attractive on a relative yield basis, so I wouldn't jump on one of those, but would look for one of the good deals that seems to keep popping up. But if you're concerned about rising rates, then even one of these CDs could be worth considering due just to the early withdrawal option.

  6. Thanks for the no-BS answer.

    I continue to believe that rates will have to go up (e.g. reversion to the mean, reduce the "real" value of $20T in US debt, expiration of "conspiracy theory" suggesting the Fed held rates on the floor until the election to get Hillary elected, etc, etc)....

    but like you say, I don't seem to be establishing a good long term track record concerning anything concerning interest rates....

    I like the way you summed up your fall-back position to not having a crystal ball....
    P.S. Your answer could be the beginning of a great post...