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One specific (popular online) bank is offering a 9 month 1.25% CD, while it's savings account is 1.90%.

There's no way I see interest rates tumbling in the next nine months, so why should I -- why should anyone -- get a 1.25% CD when savings accounts are paying 52% more interest?

(This question is not specific to this particular bank at this particular time. It's about the general practice of buying low-rate CDs when savings accounts have a higher rate.)

  • You've answered your own question. If you're not too busy to make a few extra bucks, some banks occasionally offer bonuses for opening an account and that can bump the yield up. – Bob Baerker Oct 9 at 22:25
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    @BobBaerker this has nothing to do with signup bonuses (and I've never seen a signup bonus at that bank). 1.9% is the no-strings-attached going rate for savings accounts at that bank. – RonJohn Oct 9 at 22:30
  • What are the restrictions on the savings account? Minimum balance? Direct deposit? – D Stanley Oct 9 at 22:46
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    @DStanley I'm pretty sure the bank in question is Ally (They do a great job and I'd highly recommend them). There's no minimums or any criteria or weird direct deposit or linked account or debit card transactions requirements imposed. – quid Oct 9 at 22:49
  • @DStanley quid is right: it's Ally, and there are no rules or restrictions (except the government mandated 6 withdrawal limit per month). – RonJohn Oct 10 at 0:16
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Because rates might be lower before the 9-month period is over. If you don't think that's likely, that's fine.

  • That's covered in the second paragraph of the question. Some serious QE would have to occur for savings rates to drop that low so quickly. – RonJohn Oct 9 at 22:21
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    This is the answer. The answer is you lock in fixed rates if you think it is advantageous to do so. No QE is necessary for a bank to change a product. Tomorrow the savings rate can change to 1.1% for no reason other than the bank decided to do that. – quid Oct 9 at 22:23
  • And then people will move their money to a bank that's still paying competitive rates. Thus, this online bank won't do it. – RonJohn Oct 9 at 22:27
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    Maybe this online bank would. It's irrelevant. Your question is "why would I lock in 1.25% for 9 months when I can get 1.9% in a variable account?" The answer to that question is "You think the variable rate will be lower before 9-months." It seems this bank just doesn't want additional short term obligations to pay in this current rate environment. But that's not relevant to the question you asked. – quid Oct 9 at 22:33
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    @RonJohn Whatever the likelihood is [of rates dropping], it doesn't alter the reason why someone would choose one over the other. If you're fairly certain rates won't drop, and don't mind the (however small) risk of another 2008-like event, take the 1.9% variable. If you think rates might drop or are unhappy with even a small risk they might, then take the 1.25% fixed. (And even with 10,000 to deposit, the difference is under 50 for nine months, so it's not going to make much difference either way!) – TripeHound Oct 10 at 11:18
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Your question of,

Why would I, as a consumer, choose X over Y?

is really only half the puzzle here. As basically stated in quid's answer, There may not be a good reason for you to choose X over Y. But, that may be the desired conclusion for you to reach based on deliberate, artificial pricing conditions the bank has created. In other words, you also need to consider,

why would the bank price X and Y in this way?

I think this is worth considering as a slight frame-challenge to your question because sometimes, banks do not price products based solely on textbook-standard approaches. As consumers, we expect that a product is priced based on risk and liquidity - more risk and less liquidity should mean a higher rate, so - unless there's an expectation of significant economic changes in the near future, you're right - we would expect a CD to have a higher interest rate, but because it doesn't, most people would probably choose the savings account. The answer to your question is "you wouldn't open the low rate CD right now."

Of course, none of us here likely know the exact reason why this bank is currently pricing things this way, but the common reasons would include:

  • They may be trying to get their balance sheet to a certain goal in certain products. A bank's own deposit strategy will dictate a level of risk and liquidity they want in their consumer's deposit accounts. From a certain perspective, a consumer opening a deposit account can be thought of as the bank taking out a loan from that person. The bank will want to maintain a certain mix of "loans" from consumers - so, in essence, they will sometimes deviate from standard pricing models to try to capture more dollars in a certain product. This is very common in institutions that serve niche markets (i.e. online-only banks, or credit unions that specialize in a certain market) because consumer behavior in those markets may not reflect a more typical institution's mix of consumers, leaving the institution with an unbalanced mix of deposits.

  • They may have some promotional strategy based on expected behaviors. Typically, institutions will have a consumer strategy based on capturing consumers and/or retaining consumers. Depending on whether a bank wants to be biased towards "capture" or "retain" at a certain point in time, they may shift their pricing to target those results. Typically, this is done because certain products are associated with certain consumer behaviors. For instance, they may be willing to essentially lose money on the savings account because it's seen as a product that helps retain customers. Or it may be seen as a stepping stone to being able to sell a consumer something else, which actually creates the retention. Often, institutions will have specific product sales goals based on these expectations, which may be targeted at promoting a specific product, or trying to create customers with a specific mix of products.

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