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Money flows out of CDs as interest rates stay low

By Tom Petruno1 LOS ANGELES TIMES1 LOS ANGELES -- The amount of money in bank certificates of deposit has fallen to a four-year low, a casualty of record low interest rates that have lasted much longer than many savers may have expected.

There still is $1.06 trillion in what the Federal Reserve classifies as small-denomination CDs, meaning those of $100,000 or less. But 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 regional bank in St. Louis.

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.

Understandably, many Americans 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 percent annualized rate, according to market research firm Informa Research Services, which surveys 3,500 banks, thrifts and credit unions weekly.

By contrast, the average one-year CD now yields 0.90 percent. The average six-month CD yields 0.63 percent.

The Fed has been holding its benchmark rate between zero and 0.25 percent since the end of 2008, foiling savers who thought that rates might be rising by now.

Many banks have responded to the Fed's rock-bottom rate by continuing to lower CD yields over the last year.

So savers planning to roll over maturing CDs have been offered less and less for their cash.

The average one-year CD yield has dropped more than half a percentage point in the last 12 months, from 1.43 percent in mid-June 2009, according to Informa.

Naturally, some banks want your money more than others, so shopping around for CDs makes sense.

"But even the top yields available have been inching lower," said Greg McBride, senior analyst at rate tracker

Even as the economy is improving, banks are still seeing 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?" said Ray Montague, an analyst at Informa.

The upshot is that CD yields are unlikely to move back up significantly until the Fed starts to tighten credit. And there is no consensus on when that may happen; analysts' estimates of the timing 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 that can be reinvested at higher rates once they start to rise.

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