Money in bank CDs falls to four-year low as savers balk

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Bank certificates of deposit may be headed for the endangered species list of the financial world -- a casualty of record low interest rates.

There still is $1.06 trillion in what the Federal Reserve classifies as small-denomination CDs, meaning those of $100,000 or less. But as the chart below shows, the small-CD total at banks and thrifts is plummeting at a fast rate, and now is back to 2006 levels.

About $100 billion has flowed out of CDs this year alone, and the runoff has totaled about $400 billion since the end of 2008, according to data compiled by the Fed’s St. Louis bank.

The money isn’t vanishing, of course. Much of it has stayed at the banks, but has been shifted to basic savings accounts or money market deposit accounts, as I noted in my Times column last weekend.

Understandably, many Americans just don’t want to lock up their cash in CDs at current depressed interest rates, so they’re keeping a record $5 trillion in liquid accounts that typically pay even less than CDs.

The average money market deposit account pays interest at a 0.41% annualized rate, according to rate-tracker Informa Research Services, which surveys 3,500 banks, thrifts and credit unions weekly.

By contrast, the average one-year CD now yields 0.90%.

Unfortunately for savers, the Fed has kept its benchmark interest rate lower for longer than most people might have expected. The Fed has been holding its rate between zero and 0.25% since the end of 2008.

And many banks have responded to the Fed’s rock-bottom rate by continuing to lower CD yields over the last year, even as the economy has improved.

The average one-year CD yield has dropped 0.53 of a point over the last 12 months, from 1.43% in mid-June 2009, according to Informa. The average six-month CD now yields 0.63%, down from 0.82% six months ago and 1.12% a year ago.

So savers who’ve been faced with rolling over maturing CDs have been offered less and less for their cash. Retirees who rely on CD income know this all too well by now.

Naturally, some banks want your money more than others, so shopping around for CDs makes more sense than ever. ‘But even the top yields available have been inching lower,’ says Greg McBride, senior analyst at rate tracker Bankrate.com.

Banks obviously would like to pay as little as possible for money, but there’s another factor weighing on CD yields: a lack of loan demand, or at least, a lack of demand from qualified borrowers.

‘If you’re not lending, why pay up for deposits,’ says Ray Montague, an analyst at Informa.

The upshot is that, even with CD yields as dismally low as they are, there may be nothing to halt the downward trend -- until the Fed finally starts to tighten credit. And there is no consensus on when that may happen; analysts’ estimates of the first Fed rate increase range from later this year to as far off as 2013, depending on the health of the economy and the financial system.

Given that level of uncertainty, McBride thinks savers should stay flexible. One option, if you don’t want to stay in a low-yielding savings or money market account: Build a classic ‘ladder’ of CDs maturing in three, six, nine and 12 months, so that you’re picking up more yield than in a liquid account but you always have some cash coming available.

Online services such as Bankrate.com list the highest-yielding CDs nationwide. Montague also suggests checking with local credit unions and smaller banks, which he says often pay better than the biggest banks.

Of course, you’ll want to stay within federal deposit insurance limits wherever you go.

-- Tom Petruno