Finding a safe place to park extra cash that actually pays you some interest has been a challenge for more than a decade.
With central banks keeping rates low to stimulate or protect much of economic activity over the past decade, it’s hard to get anything for your money.
For years, bank certificates of deposit were Wall Street’s version of useless books, gathering dust on shelves 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 common in fruitful fields.
Take Seattle-based Verity Credit Union, which launched its CD Special program, with interest rates up to 3.5% — with no minimum deposit and NCUA insurance up to $250,000.
or how capital one, Who recently jacked up his Performance 360 Savings Account to 3.0% and raised his 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 competitive rates, they are an excellent part of a fixed allocation in a portfolio,” said Devin Carroll, owner of Carroll Advisory Group. “Many investors have seen their “safe money” held in bond funds decline as much or more than their stock funds.”
However, “now, with bank CDs, there is an opportunity to earn interest with almost no risk of seeing principal decline,” Carroll noted.
Elevating Cash Accounts
Why are bank CDs generating so much interest right now?
Derek M., Senior Financial Advisor at StrategicPoint Investment Advisors. “Consumers are increasingly looking to CDs for a number of reasons: elevated savings, poor stock market returns and high yields,” Amy said. “As recently as August, Bank of America’s “Consumer Checkpoint” continued to show that consumers have increased the level of cash in their checking and savings accounts. Consumers are wisely looking to increase the yield on the cash they’re sitting on.”
Had the stock market been doing better in 2022, Amey suspects some of that extra cash would have been invested.
“However, with poor market returns so far this year and scary headlines of a possible recession, we believe investors are looking for safety over risk,” he noted. “CD rates, in any number of timeframes, are reaching levels not seen in a decade. 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 rates of 4% or more.
“We’ve seen a sharp increase in rates over the last six months, attracting the attention of many individuals who would never have considered a CD before,” said Frank Trotter, president of Battle Financial. “CD rates are more significant now, with one-year yields near 4% and five-year yields in the 4.50% range. Especially with many big-box banks paying low, no-interest on checking and savings, these rates seem more attractive to investors.”
Tips for getting the best CD deals
Getting a CD with a higher rate is the low-hanging fruit these days.
“There are so many different websites now that will help consumers compare CDs,” Amey told TheStreet. “Some have screeners where you select the type of CD you’re looking for and the length of time you’re considering.”
Another idea I recommend is to check your current CD rates.
“It might make sense to break your existing ladder and then reinvest,” he said. “People who buy multi-year CDs in 2020 and 2021 may find that even after paying penalties for breaking their current CDs, they may more than recoup those penalties because 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 determine your deposit amount and how long you’re willing to let your money go,” Trotter said.
Also, be sure to shop around.
“Just this morning I saw a difference of over 1.50% between banks in CD rates,” added Trotter. “Before you buy a CD, be sure to read the details – sometimes you have to make other deposits or other work to reach the advertised rate.”