With so much attention being paid to the inverted yield curve and the recession that’s likely to follow six to 24 months later, financial advisors may be overlooking a key opportunity for their clients’ cash and fixed income assets: locking in current interest rates.
One-year CDs are paying as much as 2.75% to 2.85% with minimums of $1,000 or less and those rates may not last, according to DepositAccounts.com, a website that tracks bank deposit rates. It reports that several “rate leaders,” especially credit unions, have cut CD rates in the past few weeks.
CDs from thrifts and banks will tend to pay more than CDs sold through the brokerage channel unless the latter are bought in the primary market, not the secondary market, which involves commissions.
“CDs are paying very well, with very little default risk — and none if they’re under FDIC limits,” says Leon LaBrecque, chief growth officer at Sequoia Financial Group. But they aren’t liquid and early redemptions come with penalties.
“I’m anticipating flat to lower rates in the next 12-18 months [and] recommending to clients that they lock in CD rates now and go further out on the yield curve,” says Eric Walters, founder and president of Silvercrest Wealth Planning, based in the Denver area.
Given the Federal Reserve’s latest projections for growth and inflation, Walters expects U.S. bond yields will be stable for the next one to three years unless growth is unusually strong or inflation rises sharply.
At the conclusion of its March 19-20 Federal Open Market Committee meeting, the Fed lowered its outlook for growth and headline inflation this year and next. By the end of that week, the yield curve inverted for the first time since 2007, with the 3-month Treasury bill trading at a slightly higher yield than the 10-year Treasury note.
In late trading Tuesday, the 3-month and 6-month T-bills were yielding more than the 2-year, 5-year and 10-year Treasury note. The 3-month T-bill was yielding 2.45% compared with 2.42% for the 10-year note and 2.27% and 2.20% for the 5- and 2-year notes, respectively. Only the 30-year Treasury bond yield, at 2.87%, topped the T-bill yields.