Finding a safe place to park extra cash that will pay you little interest for more than a decade can be a challenge.
As central banks have held rates to boost or protect much of economic activity over the past decade, it’s been difficult to get anything for your money.
For years, bank certificates of deposit were Wall Street’s version of unused books, gathering dust on a shelf 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 yields of 3.5% to 4% are commonplace in fruit plains.
Take Seattle-based Verity Credit Union, which launched its CD Specials program with interest rates up to 3.5% — no minimum deposit and NCUA insured up to $250,000.
Or how capital one, It recently raised its Performance 360 Savings Account to 3.0% and raised its one-year 360 Certificate of Deposit rate to 4.0%?
He is not alone.
Merrick Bank, Banesco US, and BMO all have one-year CD packages with rates ranging from 3.75% to 4.0%.
“While bank CDs pay a competitive rate, they are the best part of a fixed allocation in a portfolio,” said Devin Carroll, owner of Carroll Advisory Group. “Many investors view their “safe money” in bond funds as less than their stock funds.”
However, “now, with bank CDs, there is an opportunity to earn interest without the risk of seeing a major downturn,” Carroll noted.
Increasing cash accounts
Why are bank CDs generating so much interest now?
“Consumers are increasingly looking to CDs for a myriad of reasons: higher savings, poorer stock market returns and higher yields,” said Derek M. Ami, senior financial advisor at StrategicPoint Investment Advisors. “As recently as August, Bank of America’s “Consumer Checkpoint” continued to show consumers have higher levels of cash in their checking and savings accounts. Consumers are smartly looking to increase the yield on cash they’re sitting on.
Ami suspects that if the stock market does well in 2022, more money can be invested.
“However, with poor returns in the market so far this year and scary headlines about a potential recession, we believe investors are seeking safety over risk,” he noted. “CD rates, in any of the myriad timeframes, are reaching levels not seen in a decade. In fact, consumers only had to look as far back 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 higher.
“We’ve seen a sharp increase in rates over the past six months, attracting the attention of many individuals who may have never considered a CD before,” said Frank Trotter, president of Battle Financial. “Now with one-year yields at 4% and five-year yields at 4.50%, CD rates are more substantial. This is especially true when many big-box banks pay little to no interest on checking and savings, making these rates look more attractive to investors.
Tips for snagging the best CD deals
Getting CDs at a higher rate is the low-hanging fruit these days.
“There are a ton of different websites that now help consumers comparison shop for 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 trick Amey recommends is to check your existing CD rates.
“It may make sense to break up your existing CD and reinvest later,” he said. “People who bought multi-year CDs in 2020 and 2021 may find that even after paying a penalty to break their current CD, they can recover that penalty as rates rise quickly.”
Additionally, think about whether you will need all or a portion of the cash before the CD matures.
“It helps you determine the amount of your deposit and how long you’re willing to let your money go,” Trotter said.
Also, make sure to shop around.
“This morning I saw more than a 1.50% difference between banks in CD rates,” Trotter added. “Before you buy a CD, be sure to read the details – sometimes you have to make other deposits or do some other work to reach the advertised rate.”