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Learning jumbo-CD game can lead to higher yields

Banks refer to them as "$100,000 jumbo CDs." The accounts were smack in the middle of the action in the late 1980s, when thrifts were wheeling and dealing "hot money" before hundreds of them went bust.

Then the whole banking system settled down and got stronger. Bank rates fell through the basement floor, and investors turned to high-yielding stocks, bonds and mutual funds.

But jumbo CDs are providing the first break to savers weary of low returns. Yields have risen by nearly one-tenth of a percent since the Federal Reserve boosted a key rate three weeks ago.

You can't say the same thing about plain-vanilla "retail" CDs, up by only a measly one-hundredth of a percent last week.

You may not have 100K in loose cash to invest, but you can get in on the higher yields if you know how jumbo CDs work:

Jumbo accounts carry the same $100,000-per-person FDIC insurance protection as low-deposit consumer accounts. Because of the 100K insurance cap, most jumbo buyers limit themselves to $90,000 or $97,000 in each account, thus protecting the interest that has accrued.

Jumbo rates move faster than those on retail CDs. Why? Because jumbo-CD buyers are highly rate sensitive; they're more concerned with the return than having branches nearby, free checking accounts or convenient automated teller machine locations.

Besides individual buyers, jumbos are purchased by banks for themselves and on behalf of trust-department customers, and by corporations. In a state or region, banks have a jungle-drum network telling them which outfits have good deals on jumbos on a certain day. Some banks find that they can take retail deposits from customers at, say, 2.5 percent and invest them at 3.5 percent.

Jumbos pay higher rates than ordinary CDs. For her $100,000, a well-heeled Mrs. Gottrocks on average today earns about one-fifth of a percent more on a jumbo Money Market Account than does Jane Doe on her smaller amount of money. But on a longer-term account such as five years, Mrs. Gottrocks' advantage falls to one-tenth of a percent.

As bank savings rates continued to tumble in the past year, Jane Doe got hit harder than Mrs. G. The average Doe short-term, low-deposit account fell by about 25-hundredths of a percent; the jumbo CD rate slipped only 15-hundredths.

How can you get in on the higher returns of jumbo CDs? By pooling your money. Let's say you have $10,000 in one CD, $25,000 in another and $20,000 in a third.

Put those together and you'll have $55,000, enough to earn a jumbo rate from an institution like California Thrift & Loan in Santa Barbara _ (800) 852-0587. According to our 100 Highest Yields survey Feb. 23, it paid 3.95 percent on a minimum deposit of $50,000 in a one-year CD.

You may need upward of $75,000 or $90,000 at another institution. If you don't have the money, you can pool your resources with relatives or even neighbors. Nine people could pitch in $10,000 each and have enough to buy one CD. It's being done in some parts of the country, and it works if you keep good records.

According to the FDIC, each jumbo CD would be insured to $100,000. Ironically, banks that offer high-paying-jumbo CDs have gotten safer, not weaker, as the industry's profits have soared.

Latest rate trend: Mortgage rates jumped on Fed rate-hike fears. The average 30-year fixed rate rebounded by nearly one-quarter percent to 7.21 percent. Bank Rate Monitor's ratio of savings rate increases to decreases narrowed slightly to 3 to 1 from 4 to 1.

Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from his office in North Palm Beach.

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