The Return of the 6-Month CD

I am only in my forties, but I have been told by my seniors of an era of largely stable interest rates when 6-month CDs offered depositors the ability to earn a premium over savings or money market rates, without the burden of locking up their money for as long as a year.

Of course, it makes sense in any environment where interest rates are stable or increasing that depositors would be rewarded, albeit marginally, for locking up their money for 182 or 183 days. However, in the post-2008 period, of course, depositors have not seen 6-month CDs that offer a premium over savings rates. Even over the last several years when savings and money market rates have been slowing moving up as the Federal Reserve raised the Fed Funds rate from zero to 1.25%, the best 6-month CD rates have been largely below the best savings rates.

With consensus estimates that the Federal Reserve is poised to raise interest rates 3 or 4 times in 2018, last week we finally saw the emergence of 6-month rates that are better than the best savings rates.

As of this writing, the best online savings rate is 1.80% and the best 6-month CD is 1.95% APY. (Local rates where you live may be higher. Check local bank savings rates here, and local credit union savings rates here. See local bank 6-month CD rates here and local credit union 6-month CD rates here).

We don’t believe that a 15 basis point premium over savings is worth chasing. Over 6 months, it amounts to 7.5 basis points which after tax is about 4 basis points. In other words, you are looking at a gain of $100 on $250,000.

Nonetheless, for many people who would otherwise consider short-term CDs, but have shied away from locking up their money for periods of 1 year or longer, the return of the 6-month CD is an interesting development.