The spread between rates on fixed annuities and one-year certificates of deposit sold by banks narrowed to 84 basis points in mid-February, according to a consultant who tracks the data.
The decline, from a 94-basis-point spread in mid-January, reflects growing competition for savings dollars, said Kenneth Kehrer, principal of Kenneth Kehrer Associates, Princeton, N.J. He noted that a year ago, the spread was closer to 200 basis points. (A basis point is one one-hundredth of a percent.)
According to the firm's data, the average base rate paid on fixed annuities sold by banks rose to 6.69% by mid-February, a slight increase from the 6.66% paid in mid-January.
The nonbonus or base rate is the underlying first-year yield on a fixed annuity, not the slightly higher bonus rate paid in the first year an annuity is held.
By contrast, one-year CDs paid an average yield of 5.85%, an increase from last month's yield of 5.72%. This meant the spread between base fixed annuity rates and CDs was only 0.84%, compared with a 0.94% spread in January.
Fixed annuities normally are expected to pay rates similar to long-term deposits, even though they are renewed yearly. That is because investors in fixed annuities are normally expected to keep renewing them until retirement to avoid tax penalties for those insured retirement-savings products.
Mr. Kehrer said that starting early last year, annuity rates rose first, increasing the gap between them and the CD rates. But since then, CD rates have been catching up.
For example, the spread between fixed annuities and CDs was 1.86% in January. It rose to 2.07% in June and then dipped to 2.05% in July.
The average first-year bonus rate for fixed annuities sold by banks was 7.61% in mid-February, up from 7.58% in mid-January. Bonus rates are typically offered to first-time customers.
The highest rates paid by bonus annuities have not changed from last month. Paying 8.25%, Keyport UltraMax was again the highest-rate bonus annuity at the mid-month mark, followed by the 8.25% offered by another annuity offered by the same company, Boston-based Keyport Life Insurance Co.
But Mr. Kehrer said most companies offering the 41 fixed annuity products he tracks monthly have markedly raised or lowered the rates offered on these products. That, he said, is an indication that insurance companies "may be reading the market differently."
National Home Life, for example, pushed up its fixed annuity products by half a percentage point, Mr. Kehrer said. In the biggest decrease, United of Omaha Co., lowered its annuity rates by about the same percentage.
"These are not small numbers," said Mr. Kehrer. "This is not like they're moving it around a little bit."
