The Return of the CD
Who needs Bonds

Who needs bonds?

Even as Ben Bernanke ended his first meeting as the new Federal Reserve Board chairman, even as he attempted to make his tenure more transparent, even as he suggested that the Fed is on the right track to keep the economy growing, inflation in check and eventually solve the bond market conundrum, investors were looking the other way.

Certificates of Deposit are back.

One of the unfortunate fallouts of a low interest rate environment, such as the one Greenspan created to give the economy a new feeling of irrational exuberance - his work with the equity markets still stings - by creating a hot housing market, was to take the good old fashioned CD and make it literally worthless. No one, with the exception of those who are in this type of investment for capital protection, really cared. There was money to be made elsewhere.

The stalwart investment for seniors, certificates of deposit offered less than one percent just four years ago. Now that has all changed. The steady rise in interest rates has refueled an interest in these financial tools. Now, these bastions of capital protection along with their FDIC insured status are paying investors over 5% for as little as twelve months.

Along with the rising rates on CDs, money market accounts are also seeing some serious rate increases as well, some not experienced in five years or more.

Most financial professionals worth their weight were warning 401(k) investors about these types of accounts. Money market accounts, the more flexible cousin of the CD, is often the default option in these types of tax-deferred accounts. The call was for more active management of your funds by using those contributions to grow wealth. Now that has changed.

When the 5% plateau was breeched, suddenly, those looking for a profitable, safe and FDIC insured location for their cash c saw the CD and the money market account as the place to not only leave money for the short term, but to leave huge sums parked inside.

The conundrum that Greenspan worried about still exists. In the short term, Treasuries of a maturity of a year or less still pay more than their long term brethren. But these short-term notes are paying less than CD's. Only question now is how long before foreign investors jump in?

You should remember though, the tax treatment of these types of investments will be better kept outside of your 401(k) plans. Because cash is usually locked up in a CD for a year, it is considered a long-term capital gain and is taxed at 15%. It is still a better idea to keep your money actively invested but now the money generated for parking your cash while you decide is much better.

This is an excellent time to begin to ladder your CD portfolio. Often used in bonds to take advantage of different market conditions, laddering allows you to buy different maturity dates. Laddering allows you have your CDs mature at different times giving you the opportunity to buy something else more favorable or roll your money back into another CD if the rates are right.