Finding a safe place to park extra cash that actually pays you some interest has been a challenge for over a decade.
With central banks keeping rates low to boost or protect economic activity for much of the past decade, it’s been hard to get bang for your buck.
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 rising interest rates lit a fire under the bank CD market, where yields of 3.5% to 4% are common around the fruit plains.
Take Seattle-based Verity Credit Union, which launched its CD Specials program, with interest rates as low as 3.5% – no minimum deposit and NCUA insured up to $250,000.
Or how about Capital One, that recently raised its Performance 360 Savings account to 3.0% and raised the 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 from 3.75% to 4.0%.
“When bank CDs are paying a competitive rate, they are an excellent piece of fixed allocation in a portfolio,” said Carroll Advisory Group owner Devin Carroll. “Many investors have seen their ‘safe money’ held in bond funds decline as much, or even more, than their stock funds.”
However, “now, with bank CDs, there is the opportunity to earn interest with almost no risk of seeing principal decrease,” noted Carroll.
Raises Cash Accounts
Why are bank CDs generating so much interest right now?
“Consumers are looking more and more to 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. “Through August, Bank of America’s Consumer Checkpoint continued to show that consumers have elevated levels of cash in their checking and savings accounts. Consumers are wisely looking to enhance the yield on the cash they are sitting on.”
If the stock market had been performing better in 2022, Amey suspects some of that extra money would have been invested.
“However, with poor market returns so far this year, and scary news surrounding a potential recession, we believe investors are seeking safety over risk,” he noted. “CD rates, in any number of timeframes, 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 rise in rates over the past six months, which has attracted 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 substantial. That’s especially the case with many large banks paying low interest. or nothing on checking and savings, these rates are looking more attractive to investors.”
Tips to Snag the Best CD Deals
Having CDs at 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 select the type of CD you are looking for and the length of time you are considering.”
Another idea that Amey has been recommending is to examine your existing CD rates.
“It might make sense to break up 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 to break their current CD, they may more than recoup that penalty as rates have risen so much 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 amount of time you are willing to let your money go,” said Trotter.
Also, be sure to turn around.
“Just this morning I saw over 1.50% difference between banks in CD rates,” Trotter added. “Before you buy a CD, make sure you read the details – sometimes you have to make other deposits or some other work to reach the advertised rate.”