WASHINGTON -- After shunning certificates of deposit for three years, consumers appear to be giving the instruments a second look.
The volume of retail CDs at commercial banks climbed nearly 1% in the seven weeks ended June 6, to $465.8 billion, according to the Federal Reserve.
"It's a slow growth, not a sharp bound," said Hugo H. Ottolenghi, editorial director of Bank Rate Monitor. It may be that people "are now seeing the kind of returns that makes them willing to lock in their money at least for a while."
Certainly, banks have been offering more appealing rates on CDs. The average rate on oneyear CDs climbed to 3.81% on June 15 from 3.24% two months earlier, according to Bank Rate Monitor.
Over the past few years, as interest rates fell sharply, many consumers shifted money from bank deposits to stock and bond mutual funds. Banks' small CDs - $100,000 or less - fell to $461.6 billion in April, from $623.5 billion in March 1991.
The recent inflow of CDs does not necessarily represent money moving back from mutual funds.
A Federal Reserve analyst said the money mainly represents transfers from interestbearing checking accounts. Rates on those accounts move relatively slowly, prompting consumers to shift money to CDs in times of rising rates.
"We're doing a better job of retaining money" as CDs mature, Said spokesman Ellison Clary of NationsBank Corp. in Charlotte, N.C.
The bank's CD rates are up about 50 basis points as compared to last year, and in some states the bank has seen a "modest net growth" in CD accounts, he said.
Sticking with Mutual Funds
The Fed analyst, who requested anonymity, said consumers who left banks for mutual funds have stayed there even in a choppy market. To the extent they have moved money recently, it has been to the relative safety of money market funds.
Money market funds jumped sharply from $348.4 billion in March to $365.1 billion by the end of May.
Banks began raising CD rates in mid-February, in response to the Federal Reserve's rate increases.
Though the CD rate increases have not matched rises in other rates, bank customers like them nonetheless. For consumers accustomed to getting 3% on a CD, even the incrementally higher yields are quite appealing, noted Mr. Ottolenghi of Bank Rate Monitor.
One of the reasons the increases in money in CDs has been small is that banks have not done much advertising to attract new deposits, he said.
Whether the trend continues through the summer depends on two factors, he said. First, the performance of alternative investments, such as stock and bond funds. And second, whether consumers, such as those with maturing CDs, continue to find the incremental rate increases attractive.