Finding a safe place to park excess cash that actually pays you some interest has been a challenge for more than a decade.
With central banks keeping rates down to boost or protect economic activity for most of the past decade, it’s been hard to get something 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.
In 2021 and 2022, this equation changed, as the rise in interest rates lit a fire under the bank CD market, where 3.5% to 4% yields are generally above the fertile plains.
Take Seattle-based Verity Credit Union, which 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 city, which recently raised its Performance 360 Savings Account to 3.0% and raised its one-year 360 Certificate of Deposit rate to 4.0%?
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 an excellent piece of fixed allocation in a portfolio,” said Carroll Advisory Group owner Devin Carroll. “Many investors have watched their ‘safe money’ held in bond funds decline as far, or even further, than their stock funds.
However, “now, with bank CDs, there is the opportunity to earn interest with almost no risk of seeing a primary decline,” Carroll notes.
Increase cash accounts
Why are bank CDs generating so much interest now?
“Consumers are increasingly looking to CDs for a myriad of reasons: increased savings, poor stock 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 that consumers have increased levels of cash in their checking and savings accounts. Consumers are wisely looking to increase cash withdrawals , on which they sit.
If the stock market had done better in 2022, I suspect that some of the excess cash would have been invested.
“However, given the poor returns in the market so far this year, and scary headlines surrounding a potential recession, we believe investors are seeking safety over risk,” he noted. “CD rates, across any myriad of time frames, are reaching levels not seen in over a decade. In fact, consumers would have to look back as far as 2007, before the Great Financial Crisis, to find CD rates as high as they are now.
Other investment professionals say they are seeing more CDs offering rates of 4% or more.
“We’ve seen a sharp increase in rates over the past six months that has caught the attention of many individuals who would never have considered a CD,” said Battle Financial President Frank Trotter. “Now with one-year yields at 4% and five-year yields in the 4.50% range, CD rates are more significant. That’s especially the case with many big-box banks paying low to no interest on checking and savings, these rates look more attractive to investors.
Tips for snagging the best CD deals
Getting CDs at higher rates is low hanging fruit these days.
“There are a ton of different websites now that help consumers compare CDs,” Amey told TheStreet. “Some have screeners where you choose the type of CD you’re looking for and the length of time you’re considering.”
Another idea that Amey recommended is to examine your existing CD rates.
“It may make sense to break your existing CD and then reinvest,” he said. “People who bought multi-year CDs in 2020 and 2021 may find that even after paying the penalty for breaking their current CD, they may be paying back more than that penalty because rates have risen so quickly. “
Also think about whether you need all or part of the money before the CD matures.
“This will help you decide on the amount of your deposit and the time you’re willing to let your money go,” Trotter said.
Make sure to shop around too.
“Just this morning I saw over 1.50% difference between banks and CD rates,” Trotter added. “Before you buy a CD, be sure to read the details – sometimes you have to make other deposits or another task to reach the advertised rate.”