With interest rates on the upswing, bank certificates of deposit are back in vogue.
Finding a secure place to park excess cash that actually pays you some interest has been a challenge for more than a decade.
With central banks holding rates down to boost or protect economic activity for most of the past decade, it’s been hard to get anything for your money.
For years, bank certificates of deposit were Wall Street’s version of unused books gathering dust on the shelf with little or no demand.
2021 and 2022 have changed that equation, as rising interest rates have lit a fire under the bank CD market, where 3.5%-to-4% returns are commonplaces across the fruited plains.
Take Seattle-based Verity Credit Union, which has launched its CD Specials program, with interest rates up to 3.5% – with no minimum deposit and NCUA insured up to $250,000.
Or how about Capital One, which recently jacked up its Performance 360 Savings account to 3.0% and raised its one-year 360 Certificate of Deposit rate to 4.0%?
They’re not alone.
Merrick Bank, Banesco US, and BMO all have one-year CD packages with rates from 3.75%-to-4.0%.
“When bank CDs are paying a competitive rate, they are an excellent piece of the fixed allocation in a portfolio,” said Carroll Advisory Group owner Devin Carroll. “Many investors have watched as their “safe money” held in bond funds has declined as far, or even further, than their stock funds.”
However, “now, with bank CDs, there is the opportunity to earn interest with nearly no risk of seeing a principal decline,” Carroll noted.
Elevating Cash Accounts
Why are bank CDs generating so much interest right now?
“Consumers are looking more and more at CDs for a myriad of reasons: elevated savings, poor stock market returns, and higher yields,” said StrategicPoint Investment Advisors senior financial advisor Derek M. Amey. “As recently as August, Bank of America’s “Consumer Checkpoint” continued to show consumers have elevated levels of cash in their checking and savings accounts. Consumers are wisely looking to boost the yield on the cash they are sitting on.”
If the stock market had been performing better in 2022, Amey suspects some of that excess cash would have been invested.
“However, with the poor returns in the market so far this year, and scary headlines around a potential recession, we believe investors are seeking safety over risk,” he noted. “CD rates, across any myriad of timeframes, are reaching levels not seen in over a decade. In fact, consumers would have to look as far back as 2007, prior to the Great Financial Crisis, to find CD rates as high as they are now.”
Other investment professionals say they’re seeing more CDs offering rates of 4% or more.
“We’ve seen a sharp increase in rates over the last six months, catching the attention of many individuals who would never have considered a CD before,” said Battle Financial president Frank Trotter. “Now with one-year yields near 4% and five-year yields in the 4.50% range, CD rates are more considerable. That’s especially the case with many big-box banks paying low to no interest on checking and savings, these rates are looking more attractive to investors.”
Tips to Snag the Best CD Deals
Getting CDs with higher rates is low-hanging fruit these days.
“There are a ton of different websites that will now help consumers comparison shop for CDs,” Amey told TheStreet. “Some have screeners where you chose the type of CD you are looking for and the length of time you’re considering.”
One other idea Amey has been recommending is to examine your existing CD rates.
“It may make sense to break your existing CD and then reinvest,” he said. “Folks who purchased multi-year CDs in 2020 and 2021 may find that even after paying the penalty to break their current CD, they may more than recoup that penalty since rates have risen so quickly.”
Additionally, think about whether you will need all, or a portion of the cash before the CD matures.
“This will help you decide on the amount of your deposit and the amount of time you are willing to let your money go,” Trotter said.
Also, make sure to shop around.
“Just this morning I saw over 1.50% difference between banks in CD rates,” Trotter added. “Before you buy a CD, be sure to read the details – sometimes you have to make other deposits or some other task to reach the advertised rate.”