Comments on: Top 6-Month CD Rates Turn For The Worse http://www.bankaholic.com/top-6-month-cd-rates-turn-for-the-worse/ Compare the Best CD (Certificate of Deposit) Rates, Highest Money Market Rates, Best Savings Accounts, Bank Deals, Interest Rates and Bank Reviews! Tue, 16 Mar 2010 16:42:19 -0400 http://wordpress.org/?v=2.8.4 hourly 1 By: Jonathan Edelfelt http://www.bankaholic.com/top-6-month-cd-rates-turn-for-the-worse/comment-page-1/#comment-175886 Jonathan Edelfelt Sun, 15 Nov 2009 05:47:11 +0000 http://www.bankaholic.com/?p=5083#comment-175886 A recent trip to my credit union to purchase a CD was a surprise. A 3-month CD yielded a measly 1.32 percent. A 5 -year CD wasn't much better at 3.43 percent. But these low rates got me thinking about another rate and that's the inflation rate. The annualized inflation rate for the month of September 2009 was -1.3 percent. That "minus" means that goods and services cost an annualized 1.3 percent less in September 2009 than they did the year before. So if I had a 3-month CD which paid me an annualized rate of 1.32 percent in this inflation environment, my "real" annualized yield for the month of September 2009 would be 2.62 percent (i.e., 1.32-(-1.3)= 2.62). If I had a 5-year CD my "real" annualized yield for the month of September 2009 would be 4.73 percent. Not bad! Consider the same CD in January 2006. According to government statistics (the Federal Reserve's H.15 publication), in January 2006 a 3-month CD yielded 4.56 percent. That month the inflation rate was 4 percent, meaning that the saver's "real" annualized yield for that month was only .56 percent. So the low CD rates offered by banks and credit unions aren't as bad as the seem at first blush. In addition, when you consider the taxes you pay on your returns, today's inflation (or rather, deflation) environment is even better. Do I have this math all wrong? It seems to me that 2009 will turn out to be a good year for CD investors (assuming, of course, that the inflation rate (or, rather, the deflation rate) doesn't change. A recent trip to my credit union to purchase a CD was a surprise. A 3-month CD yielded a measly 1.32 percent. A 5 -year CD wasn’t much better at 3.43 percent. But these low rates got me thinking about another rate and that’s the inflation rate. The annualized inflation rate for the month of September 2009 was -1.3 percent. That “minus” means that goods and services cost an annualized 1.3 percent less in September 2009 than they did the year before. So if I had a 3-month CD which paid me an annualized rate of 1.32 percent in this inflation environment, my “real” annualized yield for the month of September 2009 would be 2.62 percent (i.e., 1.32-(-1.3)= 2.62). If I had a 5-year CD my “real” annualized yield for the month of September 2009 would be 4.73 percent. Not bad!

Consider the same CD in January 2006. According to government statistics (the Federal Reserve’s H.15 publication), in January 2006 a 3-month CD yielded 4.56 percent. That month the inflation rate was 4 percent, meaning that the saver’s “real” annualized yield for that month was only .56 percent.

So the low CD rates offered by banks and credit unions aren’t as bad as the seem at first blush. In addition, when you consider the taxes you pay on your returns, today’s inflation (or rather, deflation) environment is even better.

Do I have this math all wrong? It seems to me that 2009 will turn out to be a good year for CD investors (assuming, of course, that the inflation rate (or, rather, the deflation rate) doesn’t change.

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