If there’s a silver lining to the current economic situation that features soaring inflation and falling stocks, it’s that savers can get more for their money.
Even after just a few months of rising interest rates, you can find online savings accounts yielding more than 3%. But that might not be good enough anymore.
“Rather than being grateful for yield, that’s going to change quickly into turning your nose up at yield,” says Matt McKay, a certified financial planner and partner at Briaud Financial Advisors in College Station, Texas.
The Federal Reserve continued to raise rates through the end of 2022, and yields on savings products are now high enough that they look like a safe haven compared with a stock market that’s in the red this year.
And that means certificates of deposits, or CDs, are back in the conversation — even if that comes with caveats.
Advisers still favor Treasury bills and notes and Series I savings bonds for getting the best combination of low risk and high yield, but some are looking more seriously at CDs now. And for the everyday investor doing it on their own, CDs offer an additional boost beyond a savings account without much effort.
“It’s good for anyone if they have cash sitting around, if you can pick up something — CDs, T-bills, whatever — it’s good to get something,” says McKay.
Remember CDs?
If you’re under 50, you might never have invested in a CD and have no memory of how investors used to build ladders of different maturities as a cornerstone of their portfolio.
“With younger clients, nobody ever talks about CDs — never, never, never,” says Dennis Nolte, a certified financial planner and financial consultant at Seacoast Investment Services in Orlando, Fla.
For some, however, CDs never went out of style. These promissory notes from banks, which have been around in the U.S. since the 1800s, come in maturities generally from three months to five years, in exchange for interest at maturity.
You’re locked into the time period or face surrender charges that vary, unless you choose a more flexible, lower-interest option. The laddering strategy consists of buying CDs at different maturities and then reinvesting as they each come due.
Over the past few years, CDs haven’t been worth it for most savers, who could get as much from a high-yield savings account without restrictions. The average five-year CD would have nabbed you nearly 12% in 1984, but now the average five-year rate is just 0.74%, according to Bankrate.com. Back in 1984, CDs were nearly 50% of deposits at FDIC-insured banks, with $1.24 trillion held in the first quarter of that year. In 2022, there’s nearly the same dollar amount, which amounts to just 6.3% of deposits.
With rates rising, you can find better-than-average deals, closing in on 4% at some banks or brokerages. Many have a $1,000 minimum purchase, but you can find fractional offers for as little as $100.
CDs versus Treasurys and I-bonds
Treasury bills and notes come in roughly the same maturities as CDs, and are yielding slightly more currently. They also have no state tax burden on gains.
You can buy directly at TreasuryDirect.gov, with a $100 minimum, but to sell, you have to transfer holdings to a brokerage. Or you can buy and sell through a brokerage, but your minimums may be $1,000.
For I-bonds, you can only buy directly at TreasuryDirect.gov, with a minimum of $25 and a maximum of $10,000 per person a year, with gifts allowed to others up to $10,000 per recipient. I-bonds are indexed for inflation, with rates that reset every six months, and today are yielding 6.89% through April 2023. The biggest caveat is that you are locked into one year, and then face a surrender penalty of three months of interest if you cash out before five years.
A strategy for today’s rising rates
If you are chasing yield and have money you don’t need for a year, then I-bonds are the place for the first $10,000.
“It makes sense to max out I-bonds before investing in CDs,” says Ken Tumin, founder of DepositAcccounts.com.
Just make sure you’re motivated enough to navigate a still-wonky website and keep track of the investment on your own, because it won’t align with any of your other accounts. McKay had a client who was eager to jump into I-bonds, and he was mad at first that McKay hadn’t recommended it. “But then he called to complain, saying this is terrible, it’s so difficult,” he says.
If you have funds beyond that for savings, consider Treasury bills or notes because the rates are higher, says Tumin. Then consider CDs. That’s what Nolte is doing with some clients, particularly older ones who have past experience with them.
“Why not get something guaranteed? It’s maybe not keeping pace with inflation, but you’re not losing principal,” says Nolte.
CD rates move more slowly than other products, so even after the next rate hike, this strategy would still apply. But already Tumin sees investors ready to lock into long-term CDs, anticipating a recession and a drop in interest rates. If rates subsequently fall, and CDs lag, they would eventually end up with a price advantage over Treasury investments. Then people like McKay will be advising clients to buy in earnest.
“That’s when CDs become most attractive — as soon as rates peak or there are cuts [in rates],” says McKay.
Got a question aboutthe mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me atbeth.pinsker@marketwatch.com.
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As a financial expert with a deep understanding of investment strategies, I want to shed light on the article discussing the current economic situation, particularly the impact on savers and the resurgence of certificates of deposit (CDs) as an investment option. My expertise in financial planning and investment management allows me to provide valuable insights into the concepts mentioned in the article.
The article highlights the silver lining for savers amidst soaring inflation and falling stocks, emphasizing the potential benefits of online savings accounts and the increased yields they offer. Notably, it mentions the Federal Reserve's continued rate hikes, making savings products, such as CDs, look like a safe haven compared to a volatile stock market.
Certificates of deposits, or CDs, have re-entered the conversation as advisers weigh their merits alongside Treasury bills, notes, and Series I savings bonds. The article touches upon the laddering strategy, a historical practice where investors built portfolios with CDs of varying maturities. The current landscape suggests a shift in focus from high-yield savings accounts to CDs, providing an additional boost to savings without much effort.
The article also addresses the historical perspective on CDs, noting their decline in popularity over the years as high-yield savings accounts became more attractive. However, with rising interest rates, CDs are making a comeback, offering better deals, some even reaching 4% at certain banks or brokerages.
Comparisons are drawn between CDs, Treasury bills, and Series I savings bonds, considering factors like yields, state tax burdens, and liquidity. Treasury bills and notes are presented as alternatives to CDs, with slightly higher yields and no state tax burden on gains. Series I savings bonds, indexed for inflation, are discussed with attention to their unique features and the caveat of a surrender penalty if cashed out before five years.
A strategy for navigating today's rising rates is proposed, emphasizing the preference for I-bonds if chasing yield and having money not needed for a year. The article suggests maxing out I-bonds before considering CDs, especially if dealing with funds beyond the initial $10,000 limit for I-bonds. The recommendation to consider Treasury bills or notes for higher rates before turning to CDs is made, aligning with the cautious approach to investment in the current economic climate.
The article concludes by discussing the anticipation of investors locking into long-term CDs, speculating on potential economic downturns and interest rate drops. The slower movement of CD rates is acknowledged, presenting a strategy that remains relevant even after future rate hikes. The insights shared by financial experts like myself indicate that CDs might become more attractive as rates peak or experience cuts.
In summary, the article provides a comprehensive overview of the current financial landscape, the resurgence of CDs, and strategic considerations for investors in the face of economic uncertainties.
