As
with most anything else, it pays to shop around when looking for certificates
of deposit (CD’s) paying the highest interest rates. Banks are offering special deals now for CD’s
of varying terms (i.e. required length of deposit). What I’ve found with these deals, however, is
that often they are “one and done”. They
may have a good rate for the initial term, but when they renew the subsequent
term features a very average rate. Some
banks, in fact, state upfront that after the initial term, the rate will fall
to half—or less—of the initial interest rate.
Banks
can be flexible in the length of terms for their CD’s, but the rates can also
vary wildly. A bank may offer a special
for a one-year CD, but if you want to construct a CD ladder (see my last post),
the rates for a three-month, six-month, or nine-month CD are likely to be much
lower.
For
these reasons, I would encourage CD shoppers to also keep brokers in mind as an
option. Brokers (such as my retirement
account custodian or even a bank with a Certificate of Deposit Account Registry
service) can purchase a huge volume of CD’s at a time from banks to negotiate a
higher rate, then sell them, with still-high interest rates, to their
clients. I’ve found that brokers have a
more consistent range of interest rates across the various CD terms. In other words, the rate for a three-month CD
is likely to be reasonably close to a one-year CD’s term. This makes construction of a CD ladder easier
and more lucrative.
In
most cases, CD’s sold by brokers are still FDIC-insured. Just be certain to deal with a reputable
broker and get in writing that the CD is insured and is not a security but is
in fact a certificate of deposit.
There
are downsides to purchasing CD’s from a broker.
Sometimes these CD’s are callable; that is, the issuing bank can decide
they don’t want to continue paying the high interest rate, will pay the
purchaser the principal and the interest earned to-date, and just terminate the
CD contract. This is more likely to
happen as interest rates generally are falling.
But
there is also a risk when rates are rising. That is happening to me right now. I purchased a brokered, nine-month, $10,000
CD that will mature in September. But
rates have risen a bit since I made that purchase, and if I were to cash in
that CD now it is worth about $9985. It
has lost value. That’s because a
brokered CD can be resold in the secondary market—the broker can resell that CD
after it is cashed in. But who would
want a CD earning 4.85% when they can purchase a new CD with a 5.1% rate? My CD has to be discounted in order to
attract another buyer.
Nevertheless,
this is not a risk if the purchaser of a brokered CD keeps it until
maturity. At that point it will not
matter what current rates are. For this
reason, it is best to only invest money in a brokered CD if you are certain the
money will not be needed until at least the maturity date of the CD.
[Of
course, if rates are falling and the bank has not called your CD, it might be
worth more than it would otherwise.
So it works both ways.]
Finally,
the interest in a brokered CD does not compound. If you roll over a maturing CD into a new CD,
you will just get a check for the interest earned; only the original principal
amount gets re-invested in the new CD.
As
an alternative to CD’s, your broker or banker may be able to offer U.S.
Treasury Bills. Right now their rates
are running very close to what I see in the brokered CD’s market. Terms vary from four weeks to fifty-two
weeks.
The
Federal Reserve last week raised the interest rate again but signaled that it
might be pausing the steady pace of increases we have seen over the last couple
of years. For that reason, some market
watchers predict we are at or very near the peak for interest rates on savings
accounts and CD’s. This might be a good
time to lock in some good rates before they start the inevitable decline.
Until
next time,
Roger
“You
could have at least put my money in the bank so that I could have earned
interest on it.” Matthew 25:27 CEV
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