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The Inverted CD Yields

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ING DIRECTI was checking ING DIRECT's CD (Certificates of Deposit) rates today and wondered how long will they continue to be inverted. A 6-month CD currently has an APY of 3.3%, while that of a 4-year CD stands at 2.5%.

What I would really like to see is a normal curve, where the longer the CD term, the higher its yield. Bank yields generally follow the economy and when you see this type of anomaly, one interpretation is that there's more uncertainty with the short-term economic outlook than that of the long-term. Another way to put it, there is more perceived risk in the short-term and hence the investment rewards are higher.

So what is the person with a long-term goal to do? My approach is not lock in my money for such a long time when shorter rates pay nearly a full percentage more. That can amount to quite a bit of interest. Sure, there's always the risk of buyer's remorse if the rates headed lower, but to me eschewing the long-term, low-yield CD is a calculated risk.

I would opt for a short-term, higher-yielding CD and keep rolling it over until the longer-term CD rates become more favorable. In fact, it may make sense to completely bypass CD's for a savings account with a decent rate. ING DIRECT's savings account currently has a 3% APY, and the funds remain completely liquid with no early withdrawal penalties. If and when CD rates become more enticing, one can quickly kick some money from the savings account into a CD.


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