Even before the Federal Reserve indicated last week that it was preparing to cut interest rates later this year, U.S. interest rates began to fall and along with them CD rates. That trend is expected to continue and accelerate once the Fed starts cutting rates, which suggests that investors who want to earn 2%-plus on a no-risk, FDIC-insured investment should lock in rates now.
“This month we’ve seen an acceleration of CD rate cuts anywhere from five basis points to as much as 40,” says Ken Tumin, founder of depositaccounts.com, a website that compares rates on CDs, including IRA CDs, savings deposits and money market accounts. “It’s time to lock in rates especially for those who want 3% APY, which for years was out of reach.”
“Today that’s easily available if you don’t mind banking online and you buy a CD that matures in five years or more. Even one-year rates are available as high as 2.8%.”
Tumin is referring to direct CDs offered by online banks, not the CDs offered by brick-and-mortar banks or brokerage CDs, which pay lower rates in the current market and had the largest rates cuts recently.
The annual percentage yields of CDs overall still top yields of Treasury securities with similar maturities — by as much as 85 basis points — but those relatively high yields won’t last once the Fed begins to cut rates. The market is pricing in 72% odds that the Fed will cut rates 25 basis points to a range between 2% and 2.25% at its next policymaking meeting in late July, according to the CME FedWatch Tool.
“Six months from now investors will look back and see that current rates are not so low,” says Eric Walters, president and founder of SilverCrest Wealth Planning, in the Denver metro area, who has been recommending long-dated bonds and CDs for a while.
In the current market, not only are CD rates higher than equivalent maturity Treasuries but the yield curve for CDs is positively sloped, with long-term CDs paying higher rates than short-term vehicles, unlike Treasuries, where the curve is inverted.
CD investors are compensated for owning longer term CDs; Treasury investors are not unless they sold Treasuries they bought months ago — rates peaked in October — to pocket some profits.
With that in mind, even investors who are leery about locking up their money for too long in a longer term CD shouldn’t shun the idea, says Tumin. Some online banks, like Ally, offer CDs with no early withdrawal penalties, though they have a lower APY than a traditional CD that charges such a penalty. An 11-month no-penalty CD at Ally pays 2.30% versus 2.55% for a 12-month CD that charges an early withdrawal penalty.
Early withdrawal penalties can vary widely among banks along with required minimums.
Ally, for example, charges six months worth of interest for early withdrawals of CDs with terms of 24 months or less; American Express charges 90 days interest for 6-month CDs; and 270 days of interest for 1- to 3-year CDs. Investors should look for non-callable long-term CDs, which banks cannot redeem early if interest rates fall and which are becoming harder to find, according to Tumin.
If the Fed cuts interest rates in July or at a subsequent meeting, bank rates on savings accounts will also decline, possibly faster than rates on CDs. Savings accounts are already paying less interest than most CDs after rising somewhat steadily along with Fed rate hikes, especially for online accounts. Some online banks even continued to increase APYs on savings accounts after the Fed hiked for the last time this cycle in December.
“It’s very likely that six months from now, after at least two rate cuts, rates on savings accounts will be 50 basis points lower by year end,” says Tumin.
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