Finding a safe place to park excess money that actually earns you interest has been a challenge for over a decade.
With central banks keeping rates low to stimulate or protect economic activity for most of the past decade, it’s been hard to get your money’s worth.
For years, bank certificates of deposit were Wall Street’s version of unused books gathering dust on shelves with little or no demand.
2021 and 2022 changed that equation, as rising interest rates ignited a fire in the bank CD market, where yields of 3.5% to 4% are commonplace in the fruit plains.
Take Seattle-based Verity Credit Union, which launched its CD Specials program, with interest rates of up to 3.5% — with no minimum deposit and NCUA-insured up to $250,000.
Or how about Capital one, who recently increased their Performance 360 savings account to 3.0% and increased their 360 certificate of deposit rate to 4.0% year over year?
They are not alone.
Merrick Bank, Banesco US and BMO all have one-year CD packages with rates ranging from 3.75% to 4.0%.
“When bank CDs pay a competitive rate, they are a great part of the fixed allocation in a portfolio,” said Devin Carroll, owner of Carroll Advisory Group. “Many investors have seen their ‘safe money’ held in bond funds shrink as much or more than their equity funds.”
However, “now with bank CDs it is possible to earn interest with almost no risk of seeing a decline in principal,” Carroll noted.
Increase cash accounts
Why are bank CDs attracting so much interest right now?
“Consumers are increasingly turning to CDs for a myriad of reasons: high savings, low stock returns and higher returns,” said Derek M. Amey, senior financial adviser at StrategicPoint Investment Advisors. “As recently as August, Bank of America’s Consumer Checkpoint continued to show that consumers had high levels of cash in their checking and savings accounts. Consumers are wisely seeking to increase the return on the money they are sitting on.
Had the stock market performed better in 2022, Amey suspects some of that excess cash would have been invested.
“However, with the low market returns so far this year and the scary headlines around a potential recession, we believe investors are looking for safety rather than risk,” he noted. “CD rates, on a myriad of timeframes, are reaching levels not seen in over a decade. In fact, consumers would have to go all the way back to 2007, before the Great Financial Crisis, to find CD rates this high. than they currently are.
Other investment professionals say they are seeing more and more CDs offering rates of 4% or more.
“We’ve seen a sharp rise in rates over the past six months, catching the attention of many people who would never have considered a CD before,” said Battle Financial President Frank Trotter. “Now, with one-year yields approaching 4% and five-year yields around 4.50%, CD rates are more considerable. This is especially the case with many big box banks who pay little or no interest on checking and savings, these rates seem more attractive to investors.
Tips for Landing the Best CD Deals
Getting CDs with higher rates is a handy fruit these days.
“There are a ton of different websites that will now help consumers compare CDs,” Amey told TheStreet. “Some have screens where you choose the type of CD you’re looking for and the duration you’re considering.”
Another idea Amey recommended is to review your existing CD rates.
“It might be a good idea to smash your existing CD and then reinvest it,” he said. “People who purchased multi-year CDs in 2020 and 2021 may find that even after paying the penalty for breaking their current CD, they can more than recoup that penalty since rates have risen so quickly.”
Also, consider whether you will need all or some of the money before the CD matures.
“It will help you decide how much to deposit and how long you’re willing to leave your money,” Trotter said.
Also, be sure to shop around.
“Just this morning I saw over 1.50% difference between banks in CD rates,” Trotter added. “Before buying a CD, be sure to read the details – sometimes you need to make further deposits or perform other tasks to reach the advertised rate.”
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