I am a customer of the Pentagon Federal Credit Union, also known as PenFed, and I jumped happily aboard when it offered an above-market 3% 5-year CD in December 2013 and January 2014. But since then its CD rates have dipped to U.S. market levels, which are very low.
Then I got this offer in an e-mail from PenFed yesterday:
Get a HIGHER YIELD certificate with PenFed!
PenFed’s offer requires just a $1,000 investment for a 1-year CD, paying 1.06%. Early withdrawal forfeits six months of interest payments. That’s good; but not wildly good. The national average for a 1-year CD is 0.24%, but BankRate.com lists several institutions offering 1.10% today.
But here’s what’s intriguing about PenFed’s ‘promotional rate.’ That 1.06% offer is placed on every PenFed CD from 1 to 4 years, and bumps up to only 1.21% for 5- and 7-year. Here is rate information from its Website:
My conclusion is that PenFed expects to sell only one thing: 1-year CDs. There would be no reason for customers to accept that 1.05% rate on a 2-year, 3-year, 4-year CD, or just slightly higher on a 5-year or 7-year CD.
Consider this: A 5-year traditional Treasury is paying 1.79% today. That is 58 basis points higher than PenFed’s 5-year and 7-year CDs. It makes no sense; except to conclude that PenFed is pushing customers toward a 1-year CD.
And maybe that’s not a bad idea. Given that interest rates seem likely to increase in the next 18 months, it makes sense for small investors to be locking in low interest rates for as short a term as possible. Some banks and credit unions offer FDIC-insured savings accounts with low minimums, paying nearly 1%.