When Rates are High, Open your Eyes

Inflation is high.

Interest rates have been hiked upwards by the Federal Reserve at record rates.

Mortgage rates have soared.  Business loans are far more expensive than they have been in recent memory. 

The stock market has taken a beating and is showing little sign of easing up its wild swings.

But…there’s a silver lining that can be found in the midst of this unprecedented chaos.

When interest rates climb as they have over the past several months, yield-bearing instruments such as CDs get to piggyback on this rollercoaster.

A CD, or Certificate of Deposit, is a savings vehicle offered by banks to provide interest rates for investors.  They are traditionally a conservative way to make your money generate a predictable return within the safety of an FDIC wrapper ¹.

When buying a CD, an investor will select a duration (or term) which can be as short as a few months, or as long as several years.  Then, the bank which is offering the CD will guarantee an annualized interest rate that is paid to the investor in varying frequencies. 

In recent memory, CDs were largely relegated to the conservative bucket of one’s investment portfolio, simply because the rates were low, and therefore unattractive.  In fact, CD rates were close to 0% as recently as 2 years ago. 

Historically, CD rates have followed in the footsteps of the prevailing interest rate environment.  In the 1980s, CD rates were well into the teens…imagine buying a CD guaranteeing a rate of return of 15-17%. 

Since that long-ago heyday, rates have fallen over time, experiencing peaks and valleys just like the stock market.  There was a slight uptick in rates just before the Great Recession of 2007-2009.  But over the past 15+ years, we have seen CD rates fall to historical lows, sometimes poking above 2%, but mostly oscillating well below that level and as close to 0% as can be.

Today, as the Federal Reserve has publicly hiked interest rates to curb the inflationary effects of the COVID-9 pandemic, banks have ridden the crest of this wave with their CD inventory.  In fact, we have not seen short-duration CD rates swell to this level since before the Great Recession.  Twelve-month CD rates are holding fast at very attractive yields, which is some modicum of solace for the casualties that equity-driven investment portfolios have endured. 

Typically, CDs reward longer-term investors with better rates.  However, we are in the midst of a unique environment where short-term rates are higher and potentially more rewarding for shorter-term investors. 

As with any investment, evaluating factors such as risk-tolerance and time-horizon are fundamental to determining what is most appropriate.  Capitalizing on market opportunities such as high interest-rate investments could be an interesting avenue to explore.

 

¹ FDIC insurance covers checking, savings, and other deposit accounts up to $250,000 per registration, per bank (www.fdic.gov)

 

 

 

This emailed article is not intended, and should not be relied upon, as investment or financial advice and does not constitute an offer or solicitation of any kind. 

PPG-5694799.1 (5/23)(Exp. 5/25)