CDs--the 5-to-7 Percent Solution? Stock Worries Are Driving Investors to Lock In Rates on Their Savings

By Kathleen Day 10/21/00

As an accountant, James G.Z. Allen knows well the potential rewards of stock market investing, and this year he had planned to steer most of his savings into mutual funds.

But weeks like this past one--in which markets went up and down--have given him pause. Suddenly, good old certificates of deposit, the plain vanilla of investing, look positively sexy.

"I've been watching my mutual funds basically go nowhere," said Allen, a 32-year-old Fairfax resident. "I compare that with the 7 percent I can get on a CD, and I'm going to go with that. The uncertainty in the market is just not worth it. I'm just too risk averse right now."

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Allen is one of thousands of investors across the country who have fueled a sharp uptick in CD investments over the last year, especially in recent months.

Part of the attraction is knowing CDs of up to $100,000 are federally insured. "Older people and moderate-income depositors especially are very concerned about the safety of their money," said Stephen Brobeck, executive director of the Consumer Federation of America, a nonprofit consumer advocacy group.

But even more important is that CDs allow investors to lock in relatively high rates, consultants say.

The total amount invested in CDs of less than $100,000 was more than $1 trillion earlier this month, up from $942.3 billion a year ago, according to the Federal Reserve Board. Money invested in CDs of $100,000 or more totaled $760.8 billion in September, up from $629.4 billion a year earlier.

"You can tell someone the market is overvalued and that it will go down, but until they experience it they don't believe it," said Alexandra Armstrong, a financial planner in the District. "People have been having fun investing in the market but they may have had their fill and want to be safe. That's not to say that they are abandoning the market. They are just having some second thoughts."

The trend, she and financial analysts say, is a welcome sign that people are more realistic about stock market investing and are retreating, at least somewhat, from the go-go mentality of the past several years.

"Since March, when the markets really started their turmoil, we've had much more interest in CDs than we've had in years," said Michael Flynn, senior vice president at Allfirst Financial Inc., which is based in Baltimore.

John Bond at Columbia Bank says he's seen a similar increase in demand.

From June through September, yields on three-month, six-month and 12-month CDs reached their highest levels in five years, with national averages ranging from 4.57 percent to 6.2 percent, but with many banks offering more than 7 percent. That culminated an upward interest-rate trend that began a year ago, said Greg McBride, an analyst at Bankrate.com, which tracks yields on a variety of financial products.

Now the yields have been drifting down as interest rate pressure subsides. That's been augmented by the slowing economy, a period when "demand for loans also falls, alleviating the need for institutions to raise as many deposits as when the economy is hot and loan demand is high," McBride said.

Still, rates remain attractive in today's uncertain environment. For banks, CDs and other consumer deposit products are often a cheaper way to raise money than borrowing in the market, bank analysts say. Nationally, the average yields offered this week for CDs were 4.56 percent for three months, 5.29 percent for six months and 5.63 percent for one year, but if consumers shop around they still can find rates as high as 6.5 percent to more than 7 percent, McBride said.

Brobeck of the Consumer Federation applauds CD investing--to a point. "As long as people are withdrawing only a portion of their funds from the market, it appears to be a sensible strategy," he said.

But, consumers also should consider U.S. Savings Bonds, Series I, he said. These U.S. Treasury bonds are paying yields above 7 percent, are exempt from state and local tax and are liquid after the first six months, even though there are some penalties for withdrawal before five years.

And, he says, consumers shouldn't just think of CDs and Treasuries as alternatives to the stock market, but also as better places to park the estimated $1 trillion they now have in lower-yielding savings and money-market accounts.

Despite the growing popularity of CDs, not everyone finds them alluring. Paul D. Pearlstein, a District real estate lawyer, said weeks like the most recent one certainly make the stability of CDs very tempting. But, he said, he inevitably decides to stick it out in the market.

"I'm on my knees praying," he said. "But I'm going to ride it through. Besides, this is a good market to buy, buy, buy."

Financial analysts say that increasingly, though, investors sound like Allen, who sums up his bruised love affair with stocks this way: "I expect periodic adjustments in the markets. They are just happening too often."

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-- Martin Thompson (mthom1927@aol.com), October 21, 2000