Financial Planning
back
It has been a great time for CDs. Investors have poured in trillions, snagging yields that often top 5%, and now banks are getting ready to hand much of that money back.
If investors aren’t careful, they could end up seeing that money reinvested at much lower rates.
With the stock market so volatile, it is no surprise Americans love certificates of deposit, which pay a fixed interest rate for a set time, typically anywhere from a month to five years or more.
Market-leading CDs with terms one-year or shorter currently offer annual percentage yields of 5% to 5.5%. Lured by such attractive rates, investors are keeping record $2.9 trillion stashed in certificates of deposit, according to FDIC data.
Because investors have tended to opt for relatively short-term CDs, banks will soon be handing a large chunk of that back to investors—about $2.5 trillion in the next year. Around $950 billion of that will mature in the next three months, according to an analysis by The Financial Brand, a financial industry trade publication.
“It’s a big deal for consumers,” says report author James White. “They need to take advantage.”
CD holders who don’t carefully reinvest the money could end up with cash locked in new certificates with significantly lower rates. The Federal Reserve’s plan to start lowering interest rates is one factor. But bank rollover policies, which sometimes disadvantage customers, can be a factor, too.
If you have a CD coming due soon, here are your best options:
Roll Your CD Over—With Care
The easiest thing you can do when your CD matures is nothing. In that case, your bank will likely automatically roll your certificate over into a new one. If your CD matures in the next month or so, this might not be a bad move.
While the Federal Reserve has all but committed to cutting short-term interest rates in September, the initial cut is likely to be just 0.25 or 0.5 percentage points. Most CDs will still offer reasonably good rates that beat inflation, which is around 2.9%. Even if you are content to let the money sit, you should check out the terms of the new CD your bank plans to offer you, especially if your original CD offered an attractive promotional rate.
While it isn’t hard to find CDs paying 5% or more, the national average rate for 12-month CD is under 2%, according the FDIC. Some banks have been known to automatically roll oblivious customers from high-yield CDs into new products that pay far less.
That said, sticking with your current bank can help you get a good deal, especially if you have a wider relationship with them and you are willing to be proactive, White says. He recommends calling and asking your bank to match top market rates. You may be able to snag one that is better than what the bank publicly advertises.
“They want to keep the money,” White says.
Lock In Rates With a 3-Year or 5-Year CD
While the Fed’s initial cuts are likely to be small, Wall Street expects the benchmark federal-funds rate, which CD rates closely track, to decline by about 2 percentage points over the next 12 months. If you can manage to part with your money it may make sense to buy a long-term CD, which will let you lock in today’s rates for years to come.
Top rates for 3-year CDs are 4.5% to 4.7%, according to rate aggregator DepositAccounts. For 5-year CDs they are 4.25% to 4.5%.
If you are reluctant to lock all of your savings up for that long, you can hedge your bets with a CD ladder. This strategy involves breaking your savings into equal-sized chunks, and investing the chunks in CDs with different maturities, such as 6 months, one year, 18 months, and two years. When the shortest-term CD matures, you can spend the money or reinvest it in a new one at the far end of the ladder.
A CD ladder will ensure you always have relatively quick access to a least some of your money, while also letting you take advantage of long-term fixed rates.
Buy Treasury Bonds or a Bond Fund
Another option is Treasury bonds or mutual funds that own them. Three-year Treasury bonds yield about 3.8%. That is significantly lower than comparably-dated CDs. But Treasuries, which you can buy through a brokerage account of the government’s TreasuryDirect website, have some advantages that CDs lack.
Treasury bonds offer a fixed interest rate until they mature, just like CDs. Unlike CDs, your money isn’t necessarily locked up—you can sell Treasuries if you need the money. (If you buy through TreasuryDirect, you will have to move them to a bank or brokerage first.)
Because Treasuries trade, their prices can fluctuate. That means it is possible to lose money if you sell them before maturity. But with interest rates set to decline, these bonds are more likely to appreciate in coming months. (Bond prices move in the opposite direction to interest rates.)
Ian Salisbury for Barron's
If You Have a CD, Pay Attention to Your Rollover Date—and Avoid This Key Mistake
If investors aren’t careful, they could end up seeing that money reinvested at much lower rates.
With the stock market so volatile, it is no surprise Americans love certificates of deposit, which pay a fixed interest rate for a set time, typically anywhere from a month to five years or more.
Market-leading CDs with terms one-year or shorter currently offer annual percentage yields of 5% to 5.5%. Lured by such attractive rates, investors are keeping record $2.9 trillion stashed in certificates of deposit, according to FDIC data.
Because investors have tended to opt for relatively short-term CDs, banks will soon be handing a large chunk of that back to investors—about $2.5 trillion in the next year. Around $950 billion of that will mature in the next three months, according to an analysis by The Financial Brand, a financial industry trade publication.
“It’s a big deal for consumers,” says report author James White. “They need to take advantage.”
CD holders who don’t carefully reinvest the money could end up with cash locked in new certificates with significantly lower rates. The Federal Reserve’s plan to start lowering interest rates is one factor. But bank rollover policies, which sometimes disadvantage customers, can be a factor, too.
If you have a CD coming due soon, here are your best options:
Roll Your CD Over—With Care
The easiest thing you can do when your CD matures is nothing. In that case, your bank will likely automatically roll your certificate over into a new one. If your CD matures in the next month or so, this might not be a bad move.
While the Federal Reserve has all but committed to cutting short-term interest rates in September, the initial cut is likely to be just 0.25 or 0.5 percentage points. Most CDs will still offer reasonably good rates that beat inflation, which is around 2.9%. Even if you are content to let the money sit, you should check out the terms of the new CD your bank plans to offer you, especially if your original CD offered an attractive promotional rate.
While it isn’t hard to find CDs paying 5% or more, the national average rate for 12-month CD is under 2%, according the FDIC. Some banks have been known to automatically roll oblivious customers from high-yield CDs into new products that pay far less.
That said, sticking with your current bank can help you get a good deal, especially if you have a wider relationship with them and you are willing to be proactive, White says. He recommends calling and asking your bank to match top market rates. You may be able to snag one that is better than what the bank publicly advertises.
“They want to keep the money,” White says.
Lock In Rates With a 3-Year or 5-Year CD
While the Fed’s initial cuts are likely to be small, Wall Street expects the benchmark federal-funds rate, which CD rates closely track, to decline by about 2 percentage points over the next 12 months. If you can manage to part with your money it may make sense to buy a long-term CD, which will let you lock in today’s rates for years to come.
Top rates for 3-year CDs are 4.5% to 4.7%, according to rate aggregator DepositAccounts. For 5-year CDs they are 4.25% to 4.5%.
If you are reluctant to lock all of your savings up for that long, you can hedge your bets with a CD ladder. This strategy involves breaking your savings into equal-sized chunks, and investing the chunks in CDs with different maturities, such as 6 months, one year, 18 months, and two years. When the shortest-term CD matures, you can spend the money or reinvest it in a new one at the far end of the ladder.
A CD ladder will ensure you always have relatively quick access to a least some of your money, while also letting you take advantage of long-term fixed rates.
Buy Treasury Bonds or a Bond Fund
Another option is Treasury bonds or mutual funds that own them. Three-year Treasury bonds yield about 3.8%. That is significantly lower than comparably-dated CDs. But Treasuries, which you can buy through a brokerage account of the government’s TreasuryDirect website, have some advantages that CDs lack.
Treasury bonds offer a fixed interest rate until they mature, just like CDs. Unlike CDs, your money isn’t necessarily locked up—you can sell Treasuries if you need the money. (If you buy through TreasuryDirect, you will have to move them to a bank or brokerage first.)
Because Treasuries trade, their prices can fluctuate. That means it is possible to lose money if you sell them before maturity. But with interest rates set to decline, these bonds are more likely to appreciate in coming months. (Bond prices move in the opposite direction to interest rates.)
