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CD comeback rides crest of high yields

Tampa Bay consmers found slim pickings when shopping for decent returns on certificates of deposit in January.

Locally, the highest-yielding six-month CD to be found was 3.75 percent from Bay Financial Savings Bank in Tampa.

Times _ and CD yields _ have changed. Last week, Clearwater's Life Savings Bank offered a six-month CD at 5.22 percent. That's up nearly 1.5 percentage points over Bay Financial's CD of 10 months ago, even higher than the best yield then on a 5-year CD.

Once shunned by consumers, CDs are making a comeback. Yields on CDs have hit their highest levels in three years, thanks to rising interest rates and competition among banks for deposits.

The word is getting out and consumers, discouraged from putting more money in mutual funds tied to weakened stock and bond markets, are steadily gravitating back into these insured deposits.

"More people are coming back to CDs as an investment vehicle," said Gerald H. Lipkin, chairman and chief executive officer at Valley National Bancorp in Wayne, N.J.

Nationally, yields on one-year CDs are up to 5.97 percent at some banks. That's nearly double the rate banks paid in February when the Federal Reserve began raising short-term interest rates. One-year CD yields also are at the highest level since December 1991.

In Tampa Bay, the highest yield last week on a one-year CD was 5.8 percent at Plant State Bank in Plant City.

Two-and-a-half-year CDs pay 6 percent to 7 percent, compared with the industry average of 3.08 percent eight months ago, according to Bank Rate Monitor, a North Palm Beach company that tracks interest rates.

The migration back to CDs is evident from government data. Time deposits of less than $100,000 at the nation's banks _ comprised mostly of short-term CDs _ rose nearly $100-million to $590.9-billion from April to June.

That's the first quarterly rise in CDs since 1991, according to the Federal Deposit Insurance Corp. Figures for July through September are not yet available.

The amount of money investors have in CDs had been gradually declining since 1992, when time deposits totaled $666.5-billion, the FDIC said.

The Fed has raised key short-term interest rates five times this year to thwart the threat of inflation, which tends to accelerate when the economy is strong.

At the same time, demand for loans from businesses and consumers has jumped in many parts of the country. For example, banks in the Southeast, such as First Union Corp. and SunTrust Banks Inc., saw loans grow 12 percent and 10.7 percent, respectively, in the three months ended Sept. 30 compared with the same time a year ago.

Banks need money to lend, but it's getting more expensive to borrow from the government or other sources.

To entice consumers who have put large sums of money in mutual funds, banks have pushed up yields and are spending millions in advertising to spread the message.

Banks typically spend more on advertising in September because they don't advertise as much during the summer. But this year the increase was clearly linked to higher CD spending, said Competitrack. Inc., a New York-based company that follows ad spending.

The ads are working. Banc One, which operates 75 banks across the Midwest, sold $3-billion worth of CDs since May, when it began raising yields, said Steve Bluhm, vice president of funds management.

Competition is also forcing banks to keep the interest rates they charge on loans low. This is causing banks' "spreads" to narrow. Spreads are the difference between what banks earn on interest charges from loans and what they pay out in interest to depositors.

Spreads are likely to continue narrowing because the Federal Reserve probably will raise interest rates further. That would force banks to fatten yields more to attract deposits.

For that reason, some investment strategists say it's not necessarily the best time to lock into a five-year CD rate, said Robert Heady of Bank Rate Monitor.

"The shrewd investors will go for the shorter maturity CDs, because yields are going to rise even more," he said.

_ Staff writer Robert Trigaux contributed to this story.