CD Rates Are Peaking. It’s Not Too Late to Lock In.

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If you have cash lying around earning next-to-nothing, it’s time to put it to work, and fast: yields on some certificates of deposit are peaking.

As the Federal Reserve has increased its benchmark rate over the past year, yields on cash and cash equivalents have risen, too. Many online high-yield savings accounts yield upward of 4%, including the 4.15% currently offered by Apple’s new savings account through

Goldman Sachs
,
which is open to holders of the company’s

Apple

Card credit card. 

Meanwhile, online CDs from a range of banks are yielding around 4% and 5% for terms of one to five years. These yields won’t likely last: yields on two-to-five year CDs, much like the two-to-five-year portion of the Treasury yield curve, tend to move in anticipation of the Federal Reserve’s actions rather than in response, said Greg McBride, chief financial analyst at Bankrate.com, which posts competitive CD rates on its site.

In fact, this has contributed to a compression between yields on different CD maturities—and even a reversal in some cases. For example, a one-year CD may yield more than a five-year CD today. Usually, the reverse is true, as banks typically reward savers with more yield for locking their money up for longer. But the Treasury yield curve is inverted, and the yields on CDs have similarly reversed.

The fears of a slowing economy and possibly a recession are driving down long-term yields, whereas short-term yields are rising along with the Fed’s benchmark federal-funds rate, said Ken Tumin, senior industry analyst at Lending Tree and founder of DepositAccounts.com. We saw an inversion in the yield curve and CD yields in early 2007, but to a much lesser extent than today, he added.

The Federal Reserve is closely monitoring economic data ahead of its May 2-3 meeting, when officials will decide whether to raise interest rates by another quarter-point or keep them unchanged. Either way, the steep, steady increases of the past year are likely behind us as inflation moderates.

Cash products offer a great opportunity not just for income-oriented retirees, but for anyone with money in the bank. “The yield environment is compelling,” said Brian Vendig, president of MJP Wealth Advisors in Westport, Conn. “We haven’t seen anything like this since pre-great financial crisis.”

How you take advantage of today’s yields will depend on your life stage and goals. First of all, everyone should have a liquid emergency fund, best held in a high-yield online savings account for easy access. CDs require you to tie up your money for the duration of the term or face an early-withdrawal penalty—or a potential loss on the secondary market, in the case of CDs offered through brokerage firms.

Beyond emergency savings, your cash management strategy will depend on your need for access, your timing, and your stomach for volatility, said Susan Hirshman, director of wealth management, Schwab Wealth Advisory. 

The strategy might look the same for retirees and non-retirees, but the goals would be different, Hirshman said. For example, a working-age couple might want to put money in CDs to save for their child’s wedding in a year or two, whereas a retired couple might want to ladder CDs for income within that same period. A typical ladder has five rungs of one-to-five year durations. If Treasury bonds offer better yields at a given duration, you could substitute those for that particular rung, Vendig said. 

Buying different maturities can also protect investors in a falling interest rate environment, Vendig added. Even though longer-duration CDs aren’t offering much in the way of extra yield, their longer duration would protect savers should the Fed cut interest rates, which would likely lead to a decline in CD rates, he said.

For money needed within three to four years, an ultrashort bond fund could be an option, Hirshman said. These mutual funds invest in a range of underlying securities and offer the potential for higher yields than a savings account or CD in exchange for more volatility, she noted. 

Money market mutual funds also offer yields upward of 4% these days. These mutual funds can be invested in a range of high-quality securities, from short-term corporate bonds to Treasury bills and municipal bonds. While these funds behave like cash most of the time, “investors need to understand their money-market funds aren’t exactly cash,” said Michael Cuggino, president and portfolio manager of the Permanent Portfolio Family of Funds. Unlike savings accounts and CDs, they aren’t FDIC insured. And in times of great market stress, like during the financial crisis of 2008, they could face liquidity constraints, Cuggino said. 

Lastly, don’t forget about taxes. Interest on savings accounts and CDs is taxed as ordinary income. Treasury bond interest is subject to federal income tax but is exempt from all state and local income taxes, whereas municipal bond income isn’t taxed at all for local residents. High net worth savers might gravitate toward money-market funds that hold municipal bonds for their favorable tax treatment. 

Write to Elizabeth O’Brien at [email protected]