It’s been some time since certificates of deposit, or CDs, were a good investment, but that’s changing in the current market. Today’s higher interest rate environment has made CDs not just viable, but for the first time in years, a potentially strong near-term investment. While average interest rates on 5-year CDs have climbed to just 1.41% (according to the FDIC, as of 9/7/23), investors who shop around can do far better. In fact, you can currently get CDs that earn well over 5%.
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The Current CD Rate Market
For much of the 2010s, the Federal Reserve kept interest rates at or near 0% in an effort to spur growth following the Great Recession. This led to an era of low yields on banking products like CDs, as interest rates for both long- and short-term options averaged well below 1%.
In an effort to combat the inflation of the last few years, the Federal Reserve has raised its benchmark interest rate back up. A series of interest rate hikes took rates from near zero in March 2022 to 5.25-5.50% by July 2023. This has made interest-bearing products of all kinds become much more valuable. While higher interest rates haven’t been great for borrowers, they’ve been a boon for people looking to make a safe investment.
CDs have regained significant strength from the aforementioned lows. Average interest rates for 5-year CDs have climbed to 1.41%, a sustainable, wealth-generating level. 3-month CDs, on the other hand, sit at an average rate of 1.31%, well above the rate you would receive from a savings account at a large bank, even nowadays.
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Of course, these are just simple market averages from the FDIC. The top CD rates beat these numbers by quite a bit. For example, Bread Financial offers a 1-year CD that yields 5.4%, as of 9/7/23. Additionally, PenFed has a 2-year CD with a 4.6% APY, while Barclays offers a 5-year product that yields 4.5% per year, both again as of 9/7/23.
What Can These Strong Interest Rates Offer?
The average interest rates on CDs are competitive with month-to-month inflation, but they still don’t quite keep pace. However, the best rates don’t just beat inflation, they can beat some stock market returns.
A CD rate of more than 4% is competitive with most investment-grade corporate bonds, arguably the next-closest benchmark security investment. This yield comes close to current bond yields, which have also been boosted by Federal Reserve rate hikes, and comes with the security of an FDIC-insured banking product.
For example, take the 5-year CD paying 4.5%, like Barclays’ cited above. An investor who puts $10,000 into this account would emerge with $12,523. By contrast, a 4% bond over that same period would leave you with approximately $300 less. The CD would be a better investment, and it’s been more than a decade since that was reliably true.
Navigating the Drawbacks of CDs
A significant drawback to a certificate of deposit over their bond counterparts is asset length. For long-term investors, especially income investors, even a 5-year CD might not offer enough duration. In that case, a 10- or 20-year bond might be a better way to lock in long-term rates.
For investors with shorter time horizons, the current CD market is competitive again. Someone looking to make a safe, several-year investment can consider these assets for their blend of security and growth. This is particularly valuable, say, for someone saving up to buy a house or take a big trip. Other investors looking to simply park their cash for a while can seek out a CD lasting only a few months, keeping their money on hand while collecting rates well beyond a simple savings account.
This also presents an opportunity for CD ladders.
Ladder investing is the practice of staggering your CD investments in time-bound intervals. You open a series of short-, mid- and long-term accounts, creating a portfolio that is “laddered” over time. It allows you to mix some of the higher returns of a long-term investment with some of the liquidity of shorter-term options.
Bottom Line
In an era of higher interest rates, CDs have finally started to regain their value relative to inflation and other asset classes. This makes them a potentially good choice for short- and mid-term investors looking for a mix of security and growth.
Savings Tips
- A financial advisor can help you build a comprehensive investment plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Cash and cash equivalents like CDs can play an important role in a diversified, well-balanced portfolio. How you should split your money between stocks, bonds and cash likely depends on your risk tolerance and time horizon. SmartAsset’s asset allocation calculator may be able to help you determine a balance that’s right for you.
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