CDs vs Online Savings Accounts

I currently have the majority of my savings in a Countrywide online account earning 4.25% APY. Assuming the rate is comparable, what advantage is there in investing in CDs vs one of these online accounts? It would seem to me that one advantage of the online account is that the money is liquid and not tied up for an extended period of time. Obviously the advantage I can see to the CD is that you can get locked in on a higher rate for a bit while the online accounts can fluctuate and change on a daily basis. Am I missing something here?

Thanks

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Reply to
joshbilsky
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Are you sure this is the current interest rate at Countrywide? And it is not some sort of short term promotional rate? Because from my reading, 4.25% is on the very high side for a money market account.

I imagine you are new to what interest rates have historically done. Historically, the longer the maturity of a fixed income product (such as a money market account, CD, or bond), then the higher the yield.

But today (and the last few years) have been anomalous. Often during this period the yield curve has inverted, meaning that longer maturities have not always translated to higher yields. An excellent, interactive graphic and accompanying text make the point quickly at

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.

Also, I think one other anomaly is present: Countrywide is offering superior rates compared to many "more reputable" banks because it needs cash (subprime mortgage problems) and possibly, I suspect, because it knows the public knows that if it goes bankrupt, getting that FDIC insurance money may involve a delay.

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Reply to
Elle

Obviously the rate can change but at this time, it's 4.25% APY

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The rates were evenhigher a few months ago at well over 5%. I've had my money in thisaccount for over a year at it's never been below 4% rate.

I am aware of the inverted yield and that the high rates on money market accounts are abnormally high right now and probably won't last forever.

They were offering the higher rates well in advance of the cash flow problems of the subprime mortgage crunch. They have always been in the top tier yields on

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you could also argue not to deal with a bank like Countrywide inthe event that they go under and having to deal with FDIC, but Ibelieve that's another topic. I understand that these yields will probably go away eventually at which time a CD would be a better investment. However, my question is specifically targeted to the present. If I can get the same rate or higher in an online savings account, with better access to my investment to move around or even use if necessary, what benefit does a CD have over it?

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Reply to
joshbilsky

wrote

You're grossly out of touch. The Federal Reserve Board lowered the benchmark interest rate significantly in the last several weeks. This benchmark rate is essentially a short term rate that is a large factor in determining how banks set their own short term rates. Money market and CD rates plummetted.

All rates were much higher a few months ago. Study more.

"Only" that which you already identified: Locking in a rate with a CD for at least the time the CD has to maturity.

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Reply to
Elle

If you consider since September of 2006 as a few months, then sure. My rate back then was 5.25% and has been steady up through December of

2007. Obviously it's much lower now but still in line with a comparable CD. I prefaced my original question by saying that locking in the rate was an advantage of the CD. Thanks for your insight.

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Reply to
joshbilsky

wrote

I did not write "lasting only a few months." I wrote a few months ago they were higher, period. Twelve months ago they were also higher (compared to today). Money market rates, including Countrywide's rates on its various categories of accounts, generally reflect the trends in the Fed's benchmark rates.

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shows these. They were pretty steady (and relatively high) from about June 06 to September 07, in fact, if you study the table at this site.

Define "comparable." Because on further investigation, I see your 4.25% account at Countrywide falls into a special category of money market accounts: A high balance one (minimum balance of $10,000) with restrictions on withdrawals (a max of six per month permitted).

Generally, comparable instruments with comparable risk have comparable yields. Bankrate.com is a good resource to compare apples to apples (or almost apples), like very short term CDs to Money Market Accounts. One thing you will find is evidence of the yield curve inversion of which I wrote. Countrywide CD promotions excepted, the highest yielding

3-month CD pays 3.4%. That yield is not comparable (at least not in fixed income parlance) to the highest yielding MM accounts, with the best paying 4.03% (with a $1000k minimum) right now, or, if you prefer, to a high balance MM account like the one at Countrywide.

I am speaking of averages, by the way. Generally, money market rates are still a bit higher than CD rates for CD maturities up to a few years, and this is evidence of a yield curve inversion. Historically speaking, an inversion is anomalous.

My follow-up remark to that was trying to say that, indeed, you're not missing anything regarding the general pros and cons of a CD vs. a money market account.

My caveat that Countrywide the institution is also a bit anomalous, for the reasons I gave, remains. I am not so sure I would want to bank on it remaining solvent. Your savings with them are FDIC protected, but I suspect either Countrywide either (1) knows people do not want to deal with the hassle of the FDIC kicking in. Hence to lure people to it, it offers somewhat superior (by just a bit) interest rates. And/or (2) it has had so many writedowns (a good word to google and study, for the interested readers, since it directly affects Countrywide's solvency) that it is desperate to fill its coffers with cash from savers blah blah.

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Reply to
Elle

A CD guarantees a rate for a long period at the cost of liquidity or penalty. Liquid accounts are basically equivalent to very short bonds which are going about 3% now. I expect the short term rates to follow the Fed rate to 2% until the recession is over next year.

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Reply to
rick++

In addition to CDs, I am going to put a few dollars in Lending Club

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which provides peer-to-peer lending, similar to Prosper. Current rates are ~8% to 18%, depending on how much risk you want to accept. The loans are for 3-years, but can be paid off early.

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Reply to
nosmo king

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