Why Are Jumbo CD Rates So Darn Popular?

Why are Jumbo CD Rates so Popular? There are actually quite a few reasons. First, they are safe. Your principal is insured up to $250,000 through 12/31/2009. Your interest is also protected, assuming when added to the principal, they are less than the FDIC insurance limits. If Congress and the President don't make the change permanent, the insurance will revert back to $100,000 on 01/01/2010. With most people losing 35% to 50% of their worth from the stock market losses these last 6-months, many are looking for principal guarantees.

Second, the rate of return is higher than other guaranteed investments such as Federal Bonds (FHLB, FNMA, etc.) or Treasuries. Considering that Fed Funds is at 0% to 0.25%, the spread between that and CDs is quite appealing. I've seen some CD rates as high as 4.05% APY for 1Y. Although most are in the 3.00% to 3.50% range for personal accounts. Rates that are available for corporations and institutional clients are around 2.50% to 3.00%.

Third, CD portfolios are quite easy to manage. You don't have to worry about daily swings in the rates. And if you set up your CDs through a custodian you can manage millions of dollars as if it is a single CD.

Finally, fixed-term CDs are guaranteed a rate of return through the maturity date. Of course this assumes the bank lasts through the maturity date, but overall I think most banks are fine. So if you invest $100,000 for 1Y at 3.50%, you know you will earn $3,500.

During times of uncertainity, Jumbo CD Rates, can be a great way to practically guarantee some earnings. Naturally it is always wise to not put all of your eggs in one basket, but this last crisis certainly hit even will diversified portfolios hard.

Let me know your thoughts.