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The humble certificate of deposit is ready for its moment. With Series I bonds about to go out of favor when the next rate falls below 4% and Treasury bills slipping, CDs are now top dog in the interest rate world, with some offers still above 5%. But not for too much longer.
“It’s time to start locking in,” says Jeremy Keil, a financial adviser based in Milwaukee.
In the fall, Matthew McKay, a certified financial planner and partner at Briaud Financial Advisors in College Station, Texas, wasn’t buying any CDs for clients and leaned more toward Treasurys. But in the wake of the Silicon Valley Bank failure, he started gathering them in earnest.
“Locking in 5%-plus CDs felt like a no-brainer to us. We think the time is now, but maybe not as exciting as it was about a month ago when the pickup of yield was well over 1% relative to Treasury notes,” he says.
CD rates tend to lag the broader market, like the proverbial tortoise. As fixed-income interest rates climbed this fall, people looking for maximum short-term yield were flocking toward I-bonds, Treasury bills, TIPS and even high-interest savings accounts instead. But then economic conditions shifted as inflation slowed, and the subsequent banking crisis also impacted demand.
“CD yields are a reflection of a bank’s desire for deposits,” explains Greg McBride, chief financial analyst at Bankrate.com. “Banks that are flush with deposits may not raise rates at all. Banks that are competing for deposits will be quicker to raise payouts. We’ve seen CD rates go up mightily, but only if you’re looking in the right place.”
So CDs are pulling ahead right now, but this is not a long-term situation.
“It’s possible that CD rates are at or near a peak for this cycle,” says Ken Tumin, founder of depositaccounts.com. “For the first three months of 2023, the average online 5-year CD yield has fallen slightly each month.”
If the economy slips into a recession, the Federal Reserve could cut interest rates and there could be loan demand and the need for banks to raise deposits, adds Tumin.
If you’re looking for yield, you also have to carefully consider your time horizon before you lock into any product that’s longer than three or six months. A two-year CD is not the place for emergency funds or cash you need for an house down payment or tuition bill, for instance. On the other end of the spectrum, it’s unlikely that you want to lock away large amounts of cash for longer time periods — like five or seven years — when you could be investing those funds in broad-market ETFs instead.
“Five years is pushing it,” says Keil. “It’s tough to even find that maturity right now. And then you have to really wonder, why are you in a guaranteed-interest account for that long?”
Where to find the best deals on CDs
Tumin’s site has been tracking several online banks that have current CD offers with yields in the low 5% range for short-term CDs, but some of these are starting to slip under 5%. Most of the terms for 5%-plus range from 10 months to 27 months.
You can sometimes get better deals from brokered CDs, which are kind of like bulk discounts you purchase through a brokerage house. But McBride says to beware that brokered CDs may cause you a headache if you want to get out of the deal early. “It’s not as simple as paying an early-maturity penalty,” he says. “That brokered CD is sold in the secondary market, and if rates move against you, you might get back less than you put in. You have to be really sure about your time frame.”
The age-old strategy with CDs is to build a ladder of different maturities so that you have some flexibility about when cash is available, especially if you’re a retiree or near-retiree counting on this as your spending income as each CD comes due.
“Now’s a good time to line that up if you’re looking to squeeze out every bit of return you possibly can,” says McBride.
Whatever you decide to do, it’s good to keep shopping as the economic situation changes. You need to continually pay attention to what’s going on in money markets and shift your cash around to get the best deal you can. “You can’t be set in stone,” says Keil. “You deserve to get the most you can for your money.”
April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.
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