Buying Cds Now Better Bet Than Passbook Savings

With interest rates lower than they've been for decades, it's time for anybody with money to think seriously about conventional notions of where is a "smart" place to keep that money.

For the past two years, many investors who hold certificates of deposit have painfully watched CD rates drop.

Each time those CDs came due, investors were presented an agonizing choice: either roll the money over and lock in a lower rate or "park" the money in savings, waiting for an upswing in interest rates.

More and more people have chosen the latter course. But it's a course they may come to regret.

In mid-November, an average $5,000 one-year CD in Washington yielded about 5.8 percent, according to Market Trends, a research company in Bellevue.

Undoubtedly, many savers whose CDs matured then felt insulted to be offered only 5.8 percent - and many probably put the money into passbook savings to wait for better times.

But they are still waiting, and some may wish they now had a second chance to lock in a 5.8 percent yield.

A spot check of banks and thrifts this week indicates that CD rates are sharply lower now: from a high of 5.05 percent to a low of 3.8 percent.

Passbook rates haven't dropped quite that fast, but they can change any time. Some Seattle passbook rates are already below 3.5 percent. Some remain at 5 percent.

Six months from now, the odds are that passbook and CD rates will be lower still. As crazy as it seems, the "smart" money right now probably should bet on the 5.05 percent for the next 12 months.

To do so requires bucking the trend. Seeking to avoid locking in current interest rates, investors have moved billions of dollars from CDs into passbook savings and money-market accounts.

In the first 11 months of 1991, consumer CDs (under $100,000) in banks and thrifts dropped by $93.1 billion, or 7.99 percent, said Gary Zimmerman, a banking reporter for the Federal Reserve Bank of San Francisco.

In the same 11 months, passbook savings accounts rose by $108 billion, Zimmerman said.

A few weeks ago, a Fidelity Investments/Gallup poll indicated few consumers plan to change their investment or savings strategy. But among those who said they will make changes, one of the biggest shifts indicated by the poll is out of CDs, apparently in the belief that interest rates will soon turn upward, Fidelity said.

"I think these people are misguided and maybe have not adjusted to the new realities" of low interest rates, said Patricia Harden, a Fidelity spokeswoman.

Economists expect no change any time soon in the pressure on the Federal Reserve to hold down interest rates to stimulate the economy.

Many experts believe there is almost no chance interest rates will go up before the end of 1992, at the earliest.

"By historic standards, today's interest rates are high," said Jay Levy, an economist at Bond College in Chappaqua, N.Y.

In the 1960s, "when there was no inflation, we had 3 percent Treasury bills and 5 percent long-term T-bond yields," Levy said. "That is what people should be thinking about in investing their money. In a time of economic uncertainty, a U.S. Treasury yielding 7.7 percent is a very sound, conservative investment."

And savers who lock in today's CD rates for another year probably will look back on it as a good decision, even though it's a painful one.

Send your questions to It's Your Money, Seattle Times, P.O. Box 70, Seattle, WA 98111. Or send by fax to 382-8879 or phone 464-3126.