A cure for market volatility: CDs

For conservative investors, this may be time to reconsider bank certificates of deposit (CDs), financial experts say.

Example: At Astoria Federal Savings, here in the New York region, two-year CDs, with a minimum deposit of $500, carry an interest rate of 4.4 percent with a yield of 4.5 percent.

That's a long way from the stock market's double-digit gains this year, but better than results on scores of mutual funds. Many have posted negative returns in 1998.

And the interest rate is in the same ballpark as the six-month Treasury bill, which requires a minimum $10,000 investment.

And this may be an opportune time to buy CDs, since interest rates are trending downward.

The primary attraction of CDs is safety. They carry federal deposit insurance up to $100,000.

In fact, a family of four could insure up to $1.4 million in deposits, including CDs, through different combinations of family members on the accounts, such as wife and husband, wife alone, husband alone, and so on.

Even so, many financial planners dislike CDs, given their low rates. They are considered inappropriate for most long-term or serious investors.

But if low risk holds top priority, only three financial instruments offer absolute, maximum safety, says Robert Heady of Bank Rate Monitor, in Florida: US Treasuries, US savings bonds, and bank CDs.

All three offer similar returns, although Mr. Heady says the CD edges out the other two. But the "important point," he says, about bank CDs is that they offer enormous flexibility.

* You can use a CD as collateral for a loan. You will usually pay a point or two higher on the loan rate than the rate your CD earns, he says. That compares favorably to a car loan, for example, of 7 percent or more.

* CDs are liquid. If you need the money, you can get it, although you pay a penalty for cashing out before the CD reaches maturity. But you can usually get your money immediately.

* The safety factor is important, says Heady. He expects the global economic and currency crisis to continue another year or so, ensuring volatility in stock and bond markets.

To buy a CD, says Heady, "shop around locally." Compare rates from a variety of banks and credit unions, which often offer high rates.

And "don't be bashful about going out of town to buy a CD," he adds. Banks offer CDs by mail, through the Internet. Bank Rate Monitor lists the top 100 highest yielding CDs in the US on its Web site: www.bankrate.com

Some of the banks offering the highest yielding rates include Net.Bank (888-256-6932), Providian National Bank (800-414-9692), and Eastern Savings Bank (800-787-2265).