CD rates!

Hi Terry,
What’s your advice please! BMO-Harris Bank just started offering a new CD rate of 2 %, APR, for 59 months, (almost 5 years!) With a 5K minimum investment per CD. Is that too long to lock up 5, 10, 15K? And a 6 interest month penalty, for early withdrawal! Do you see rates moving much in the near term or the five year interim? Can you recommend anything better for your Facebook friends? Or is this a pretty good deal now? Hate leaving money in a savings account with almost zero return! What do you think? Thank you, again! (Already posted on you Facebook page!)

Terry Says:  There is an easy way to answer the first part of your question, which is “is it too long to lock up this rate.”  Do you foresee ANY need for this money in the next 5 years?  If so, for sure it’s too long.  Here’s the answer to the second part of your question: “is this 2% a good rate?”  You will only know that in hindsight!  How foolish will you feel if rates go much higher for some reason, and you’re locked in at “only 2%”?.

Right now, the 10-year Treasury is yielding under 2 percent, and as you point out, you get nothing in CDs or money market accounts.  So the yield is “fair” right now.  But this is part of a larger question of how low rates can go.  They are “negative” right now in Germany, Scandinavia, and Japan.  That is, people are paying the government to hold their money — seeing no other better use for it.  I certainly doubt that will happen here, but rates have stayed so low for so long that even 2% is tempting.  But I’m not doing it with my own money!