Finding a safe place to park excess cash that actually pays you some interest has been a challenge for over a decade.
With central banks holding rates tight over the past decade to boost or protect economic activity, it’s been hard to get your money’s worth.
For years, bank certificates of deposit have been Wall Street’s version of unused books, gathering dust on a shelf with little or no demand.
2021 and 2022 changed that equation as interest rate hikes ignited a fire in the bank CD market, where 3.5% to 4% yields are common across the boarder.
Consider Seattle-based Verity Credit Union, which launched the CD Specials program, with interest rates as low as 3.5% – no minimum deposit and NCUA insured up to $250,000.
Or how Capital One, that recently increased its Performance 360 Savings Account to 3.0% and raised the one-year rate on its 360 Savings Certificate 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 a good part of a fixed allocation in a portfolio,” said Devin Carroll, owner of Carroll Advisory Group. “Many investors have seen their ‘safe money’ in bond funds shrink as much or even more than their stock funds.”
However, “now, with bank CDs, there’s an opportunity to earn interest without risking a decline in principal,” Carroll said.
Raising cash accounts
Why are bank CDs so popular right now?
Derek M., Senior Financial Advisor at StrategicPoint Investment Advisors. “Consumers are increasingly looking to CDs for many reasons: high savings, low stock market returns and high yields,” Amy said. “As recently as August, Bank of America’s ‘Consumer Monitor’ found that consumers are showing high levels of cash in their checking and savings accounts. Consumers are smartly looking to increase the amount of cash they have on hand.”
If the stock market had performed better in 2022, Amy suspects that some of that excess money would have been invested.
“However, with poor returns in the market so far this year and scary headlines about a possible recession, we believe investors are looking for safety from risk,” he said. “The CD rate, at any number of intervals, is reaching levels not seen in decades. In fact, consumers have to look back to 2007, before the Great Financial Crisis, to find CD rates as high as they are now.”
Other investment professionals say they’re seeing more CDs offering yields of 4% or more.
“We’ve seen a sharp increase in rates over the last six months, which has caught the attention of many people 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 significant. This is especially true for many large banks that pay low interest on checking and deposits, and these rates for investors are more attractive.”
Tips for getting the best CD deals
Getting CDs at higher prices is low-hanging fruit these days.
“There are various websites now that help consumers compare CDs,” Amy told TheStreet. “Some have screens where you select the type of CD you’re looking for and the length of time.”
Another idea that Amy recommended is to check the prices of your existing CDs.
“It makes 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 a penalty for breaking their current CD, they may end up paying more than that penalty because prices have risen so quickly. “
Also, consider whether you will need all or part of the cash before the CD matures.
“This will help you decide on the amount you want to deposit and the amount of time you want to put your money away,” Trotter said.
Also, make sure to shop around.
“Just this morning I saw more than a 1.50% difference between banks in CD rates,” Trotter said. “Before buying a CD, be sure to read the details – sometimes you have to make other deposits or perform some other task to reach the advertised rate.”