CD yields rise, luring the jittery

Nervous investors looking to stash their money in a safe place are finding certificates of deposit especially attractive as interest rates have steadily increased over the past six months.

The average rate of return on a one-year CD nationally has gone from 1.92 percent in April to 2.56 percent this week, according to Bankrate.com, a financial advice and data website.

In the Boston area, Sovereign Bank offers the highest rate for a one-year CD, 3.25 percent, followed by Citizens Bank of Massachusetts at 3.20 percent and Rockland Trust Co. at 2.96 percent, according to Bankrate.com.

Shorter-term CDs are paying even better locally - as much as a 4 percent annual yield for a nine-month term.

Financial analysts say there are a couple of major reasons for the uptick. Some banks are desperate for business. The lockdown in the credit mar ket has slowed borrowing between banks, making it critical for them to increase their cash reserves. Others are taking advantage of a tumultuous economic environment in which individual investors have suffered massive erosion in their stock and mutual fund accounts and are looking for security with guaranteed returns.

Also, as part of the federal financial rescue plan, the Federal Deposit Insurance Corp. has increased the coverage on bank accounts - including CDs - to $250,000 from $100,000, giving banks another tool to attract new customers.

"Maybe they are trying to draw clients in as well, not just for the money but for competitive reasons," said Eric Fitzwater, a senior analyst at SNL Financial, a markets research firm in Virginia. "Banks need to get money any way they can."

Until April, the average one-year CD rate had essentially mirrored the Federal Reserve's federal funds rate, considered a benchmark for lending. Thirteen months ago, the Federal Reserve began cutting the funds rate from a high of 5.25 percent to 1.5 percent on Tuesday, as panic spread in financial markets from Asia to the United States.

"The global economy is in turmoil, and credit markets are frozen," said Greg McBride, senior financial analyst for Bankrate .com. "Without properly functioning credit markets, it is like starving a fire of oxygen; the economy cannot grow."

CD rates are even higher in other parts of the country where the mortgage crisis has been more devastating than in Massachusetts. For example, E-Loan in California offers a 4.31 percent rate on a one-year CD. In Florida, VirtualBank is advertising a 4.35 percent rate. Sovereign Bank officials said they raised their CD rates in August, before the big turmoil on Wall Street, as a way to attract customers.

"The deposit business is the core of any banking franchise. We are constantly looking to garner deposits from our customers," said Alison Rourke, Sovereign's director of strategic planning. "It isn't in the midst of a credit crisis here at Sovereign."

Mike Jones, a Citizens Bank spokesman, said the Providence-based bank considers several benchmarks when determining CD rates, not just the federal funds rate. According to the bank, its ratio of capital to assets is a relatively high 9.29 percent.

"Our capital position is strong," Jones said. "We are pricing our products competitively to service our existing customers and attract new customers - not to obtain capital."

The Massachusetts Bankers Associations recommends that potential investors shop around before choosing where to deposit money. Jon Skarin, its director of federal regulatory and legislative policy, said CD rates aren't likely to slide much. CDs are "a very stable way for banks to fund their lending activities," Skarin said. "It may take more than that to loosen it up and bring the cost of funds down quickly."

Jennifer McKim can be reached at jmckim@globe.com.