Matthew Goldberg, a financial analyst at Bankrate, points out that despite the Federal Reserve’s slowdown in raising rates, individuals can still take advantage of the highest yielding five-year CD rates in over a decade. However, there is a possibility that this opportunity may soon come to an end. The rates of long-term CDs are currently at their peak due to the recent deceleration in rate increases. This is because the Fed’s rate decisions have a direct impact on CD yields. With inflation cooling down, future rate increases are uncertain as the Fed evaluates its options.
Goldberg emphasizes that if the Fed is approaching the end of its rate-hiking cycle, there will be no additional incentive for longer-term yields to rise. Currently, the highest yielding 5-year CD rate is around 4.6% APY, which is the highest since 2008. This makes it a rare opportunity to lock in a high long-term yield.
Here are eight reasons why now might be a good time to consider a longer-term CD:
1. If you have money saved in short-term savings accounts, taking advantage of a longer-term CD with higher yields can be beneficial. According to a Bankrate survey, only 22% of Americans with short-term savings have a savings account with a yield of at least 3% APY.
2. If you have funds that you won’t need for a period of time, consider placing them in a CD instead of a high-yield savings account. CDs generally offer a higher fixed APY compared to variable APYs offered by savings accounts. However, be sure that you won’t need these funds during the CD term to avoid early withdrawal penalties. Consider a no-penalty CD for funds that may be needed during the CD term.
3. CDs offer a guaranteed return, as long as they are within the FDIC’s limits and rules. This makes them a safe investment option, especially during uncertain economic times. “So if you’ve had your eye on one of those multi-year maturities, I think this is a good time to lock that in — they may not get much better,” says Goldberg.
4. A 5% yield is attractive compared to other investment options, especially during normal times. With current rates, a 2-3% yield is considered to be close to keeping up with inflation. Having a 5% return on a CD is a strong investment choice, particularly given the lower risk compared to a year ago.
5. If you believe that rates will decrease in the near future, locking in a long-term CD yield now can be advantageous. It’s impossible to predict future rate changes with certainty, as seen during the pandemic when rates dropped unexpectedly. Consider a bump-up CD if you don’t want to miss out on potentially higher CD APYs.
6. Creating a CD ladder, with CDs of varying terms, can be a strategic approach in the current rate environment. While traditionally, five-year CDs had higher yields than one-year CDs, currently CDs with terms ranging from six months to 18 months are likely to have the highest yields.
7. CDs offer a market-like return without market risk. By securing a fixed APY and having FDIC insurance coverage, you can enjoy the benefits of a CD with guarantees. Achieving a 5% return on the cash portion of your portfolio can be a favorable outcome.
8. If you are retired, it may be wise to lock in a CD yield now to stay ahead of or keep up with long-term inflation. While there is no guarantee that inflation will remain at elevated levels, a long-term CD may help preserve your purchasing power.
In conclusion, a long-term CD can be a suitable option for money that you won’t need in the near future. By securing a longer-term CD now, you can potentially protect your purchasing power in case rates decrease. However, it’s essential to consider your risk tolerance and time horizon to determine if other investment options align better with your financial goals.
(You can read the original article on Bankrate.com)
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