Tuesday, 11 June 2024

You May Not See This CD Trend Again in Your Lifetime

by BD Banks

You May Not See This CD Trend Again in Your Lifetime

Image source: Getty Images

Something rare is going on with certificates of deposit right now. It’s been more than 35 years since the last time we saw this happen. Since it’s such an unusual occurrence, it might not happen again in your lifetime.

It’s not the current high yields that CDs are offering that are so unusual. Rates have been above 5.00% numerous times before, including right after the 2008 recession.

But there is something CDs are doing right now that they haven’t done for almost four decades — and they might not do it again for another generation.

This once-in-a-generation phenomenon presents a great opportunity for investors

For the last 35 years, there’s been one simple fact that has been true about investing in CDs. If you wanted the highest yields, you had to buy CDs with the longest terms. A 5-year CD has consistently, for decades, offered better yields than a 1-year CD and a 1-year CD has consistently offered better yields than a 6-month CD.

There’s an obvious reason for this. If you buy a CD with a longer term, you are agreeing to give up access to your money for a longer period of time. You are taking on more risk when you do this, both because you might need the money and not be able to access it without a penalty and because you’re stuck in the CD even if interest rates go up.

Banks need to pay consumers more to get them to agree to take on this added risk, so longer-term CDs come with a term premium.

Things changed in 2023, though. All of a sudden, shorter-term CDs began to offer higher yields. This phenomenon is called an inverted yield curve. It likely occurred because rates had climbed so much due to the Federal Reserve’s efforts to fight inflation after the pandemic that rate cuts began to seem inevitable once inflation began to show signs of cooling.

The Federal Reserve has repeatedly indicated that it will cut rates as soon as inflation reaches a sustainable level. While it’s still above the Fed’s 2.00% target, it’s moving in the right direction, topping out at 3.5% or under so far this year, compared with 4.1% in 2023 and 8.0% in 2022.

With rate cuts seemingly inevitable, banks don’t want to offer to pay today’s record-high yields for long periods of time. That’s why you can get a much better rate on those short-term CDs now, while the yields on 5-year CDs are much less impressive (although they’re still very high by historical standards).

Find a short-term CD to invest in today

You may not see an inverted yield curve like this again, as this hasn’t happened since 1989 and it took very unusual conditions, including a global pandemic and record-high inflation resulting in part from billions in stimulus funds. Those conditions likely (hopefully) won’t come around again anytime soon.

That means you have a once-in-a-generation opportunity to buy short-term CDs, make a very small time commitment, and earn amazing rates. You shouldn’t miss that chance. Check out the rates on short-term CDs (start with The Ascent’s guide to the best 1-year CD rates) to see what’s out there and, if you have money you won’t need for a while, seriously consider buying a CD today.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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