The spread between rates paid on fixed annuities and one-year certificates of deposit sold by banks narrowed in the last month, a consultant has found.
The narrowing, which continues a trend that started in the middle of last year, is slowing sales of fixed annuities, said Kenneth Kehrer, principal of a Princeton, N.J., consulting firm that bears his name.
According to the firm's data, the average base rate paid on fixed annuities sold by banks rose to 6.66% by the middle of this month, a slight increase from the 6.64% paid in mid-December.
The base rate is the yearly yield on a fixed annuity when it is renewed, not the slightly higher bonus rate paid in the first year an annuity is held.
By contrast, one-year certificates of deposit paid an average yield of 5.72%, a marked increase from last month's yield of 5.47%. This meant that the spread between base fixed annuity rates and CDs was only 0.94%, compared with a spread of 1.17% in December.
Although he could not provide sales numbers, Mr. Kehrer said he was told by bankers that annuity sales have been decreasing since October. He attributed the decline to the narrowing of the spread between deposits and fixed annuities.
He added that sales of annuities could decline even more if an inverted yield curve develops and short-term interest rates exceed long-term rates. Mr. Kehrer said such a development is seen as a possibility by many experts.
Fixed annuities normally are expected to pay rates similar to long-term deposits, even though they are renewed yearly. The reason is that investors in fixed annuities are normally expected to keep renewing them until retirement to avoid tax penalties for these insured retirement-savings products.
Mr. Kehrer said that starting early last year, annuity rates rose first, increasing the gap between them and CD rates. But since then, CD rates have been catching up.
For example, the spread between fixed annuities was 1.86% in January. It rose to 2.07% in June, and then dipped to 2.05% in July.
He said that one reason for the narrowing of the spread between fixed annuities and CDs is that banks have become more aggressive recently about competing for deposits to fund increased lending activity.
Also, the yields paid on intermediate bonds have moved closer to the yields on short-term bonds. Most fixed annuity deposits are invested in intermediate bonds.
The average first year bonus rate for fixed annuities sold by banks was 7.58% in mid-January, up from 7.50% last month. This is an indication that annuity providers are trying to lure first-time customers with more attractive rates, Mr. Kehrer said.
Paying 8.25%, Keyport UltraMax was the highest-rate bonus annuity at the mid-month mark. Another of Keyport Insurance Co.'s fixed annuities was tied for the second-highest bonus yield of 8.15% It was tied with a fixed annuity sold by Provident Life & Accident.
John E. Arant, a senior vice president at Keyport Life Insurance Co., Boston, said his company pegs fixed annuity rates to the performance of five-year Treasuries. He said the firm was not engaging in one-upsmanship to get money away from competing products.
He added that his company's fixed annuities offer base yields that are 1% below the bonus yields.
Last month the highest bonus yield among bank-sold annuities was 8.15%, offered by a fixed annuity from Jackson National Optimax. Western National Savers 5000 continued to offer the highest base rate, paying 7.45%, up from 7.30% in mid-December.
