Are You A Saver??

If you’re hoping 2012 will herald the return of decent CD rates, brace yourself. The forecast for savers calls for bottom-of-the-barrel CD rates for the entire year.

With the Fed’s projection to hold the federal funds rate between zero percent and 0.25 percent through late 2014, rates on savings vehicles, such as CDs, savings and money market accounts, will most likely stay in a slump.

No significant rate movement is expected this year, but economic events may influence longer-term CD rates in a positive direction. One that may prod rates upward is the end of Operation Twist, an easing program instituted by the Fed in November to push long-term rates down. The program will last through June.

Other forces are working to keep interest rates low, including the European debt crisis. That impact may be mitigated with time as people feel comfortable moving out of the safety of Treasuries.

But for now, here are your alternatives:

This may seem familiar, but balancing the need for yield with safety will be the name of the game in the coming year.

There are only two ways to increase yield: Buy longer maturities, or go further down the credit-quality ladder. Both come with additional risks:

• The risk inherent in longer maturities lies in interest rate changes, specifically locking in a long term CD and then rates bumping up. 

• Bonds (further down the credit scale); such as municipal, corporate and high-yield bonds, in that order, may come with some risk to principal in addition to interest rate risk. So use caution. They are riskier than CDs, and as a saver, if you consider small allocations to bonds make sure they are within your risk tolerance and they represent only a modest amount of your overall portfolio.

As mentioned in previous posts, 2012 will likely be fraught with uncertainty. With no definitive answers, the best course of action for CD investors is to stick to the short end of the yield curve and diversify your savings to combat an unknowable future.

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