Leading 2-year CD rate soars to 18-month high

Piggy bank in dollar bills

The best nationally available 2-year CD yield has popped to the highest it's been in over a year and a half.

CSBdirect raised its return to 1.55% APY this week, with a modest $1,000 minimum.

That's well over a full percentage point more than the national average of this term, which is 0.38% APY. It's also more than the top 3-year CD is paying.

We haven't seen anything quite like this since February 2013 when Live Oak Bank offered 1.75% APY for less than two weeks.

But to be honest, we aren't surprised.

With the Federal Reserve planning to reverse course and start pushing short-term interest rates higher next year, every bank and credit union will need to start rebuilding the deposit base they've allowed to wither over the past seven years.

More about that later.

First, let's look at where you can find the best deals right now.

TOP 2-YEAR CD RATES: Nationally Available Bank Deals

Bank APY Minimum Deposit
CSBdirect 1.55% $1,000
Salem Five Direct 1.25% $10,000
CIT Bank 1.25% $25,000
NexBank 1.25% $10,000
Colorado Federal 1.25% $5,000
Nationwide 1.22% $500
CalFirst 1.20% $5,000
GE Capital 1.20% $500
Ally Bank 1.19% No Minimum
BAC Florida 1.19% $
Silvergate Bank 1.16% $25,000
VirtualBank 1.16% $10,000

To qualify for this list, a bank must allow savers from all 50 states to buy its certificates of deposit online or through the mail.

Our CD calculator will help you figure out the interest you'll earn for any term, amount and interest rate.

TOP 2-YEAR CD RATES: About The Banks

Bank Description URL
CSBdirect The online division of Citizens State Bank, which has four branches in Florida. www.csbdirect.com
Salem Five Direct The online division of Salem 5 Bank, which has 23 branches just north of Boston. www.salemfivedirect.com
CIT Bank The online consumer bank of CIT Group Inc., which offers financing to small businesses and middle-market companies. www.bankoncit.com
NexBank A division of NexBank Capital Inc., which has two branches in the Dallas area. www.nexbank.com
Colorado Federal An online bank based in Greenwood Village, Colorado. www.coloradofederalbank.com
Nationwide An online bank owned by Nationwide Mutual Insurance Company and its affiliates. www.nationwide.com
California First National Bank An online bank owned by the same company that runs California First Leasing Corp., which finances all sorts of high-tech business equipment. www.calfirst.com
GE Capital Bank One of two online banks, each with its own FDIC insurance, that are subsidiaries of GE Capital Corp., the financial services unit of the manufacturing giant. gecapitalbank.com
Ally Bank An online bank based in Charlotte, North Carolina. www.ally.com
BAC Bank A community bank with one location in Coral Gables that sells its products nationally through My e-BAnC. www.bacflorida.com
Silvergate Bank A community bank with four branches in southern California. www.silvergatebank.com
Virtual Bank The online division of Sabadell United Bank, which has 23 branches in Florida and is owned by Banco Sabadell, Spain's fourth-largest bank. www.virtualbank.com

Although some community banks and credit unions have been advertising local deals on 2-year CDs, our new national leader blows most of those away.

The very best returns from credit unions, for example, can be found at Gulf Coast Federal Credit Union in Corpus Christi, Texas, and the Transit Employees Federal Credit Union in Washington, D.C.

Both are paying savers 1.55% APY — the same as our top national rate.

But we think community banks and credit unions will adjust to rising national rates rather quickly, and anyone in the market for a 2-year certificate of deposit should be searching newspaper ads, Bankaholic.com and Bankrate's database of the best CD rates for the latest local deals.

Why is that?

The Federal Reserve has driven short-term interest rates to record lows by drastically reducing what's called the federal funds rate. That's what commercial banks pay to borrow money from each other through the Fed.

Since it's been essentially zero since December 2008, banks have been able to get pretty much all of the money they need for loans through the Fed for essentially nothing.

Since the banks didn't need our deposits, they slashed rates and the amount of money savers have invested in CDs dropped by half — from just over $1 trillion dollars in 2010 to just over $500 billion today.

But with the Fed widely expected to begin raising the federal funds rate sometime next year, banks and credit unions are beginning to offer slightly better returns in an effort to corral as much money as they can before deposits become substantially more expensive in 2015 and 2016.

How much more expensive?

A poll of Fed board members shows that they expect the federal funds rate will be between 1% and 2% by the end of 2015 and between 2% and 3% by the end of 2016.

Savers can expect the average return of most CDs to rise by about the same amount, or something like 1.4% to 2.4% on 2-year CDs by the end of 2015 and 2.4% to 3.4% by the end of 2016.

After five years of earning practically nothing on their bank accounts, savers deserve a return to reasonable rates as soon as possible.

Contributing editor Darci Swisher provided research for this report.
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