5 Year CDs - A Safe Option In An Uncertain Interest Rate Environment

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CDs, in particular many online five year CDs, are a safe option in the current interest rate environment.

Editor's Note: This article cites a 6-month early termination fee on Synchrony Bank's 5 year CD product. In 2016, Synchrony Bank's terms and conditions were changes so that the early termination fee is now 1-year of interest on the CD.

The last couple of weeks have seen virtually unprecedented volatility in the US bond markets. While some analysts (perhaps most notably Deutsche’s Joe LaVorgna) say that the Fed could surprise markets and raise rates as early as June 2015, we have also seen the 10 year Treasury fall below 2% as a result of Ebola and global market fears.

As a result, the most sensible strategy for money that you do not anticipate needing for a period of time is to buy bank issued CDs, specifically 5 year CDs. By so doing, you are coming to terms with the likelihood that low rates may be here to stay for a reasonably long period of time and, thus, finding a safe way of getting higher yields than savings or money market accounts now offer and at the same time protecting yourself from the possibility of seeing the 10 year Treasury rise above 4% before October 2015. Bank issued CDs, especially 5 year CDs, offer higher yields than savings. Some banks also provide an option against a sharp move in Treasuries in the form of attractive early withdrawal penalties.

Should interest rates move dramatically higher, bonds – even short duration bond funds – will move dramatically lower. We saw fixed income values fall in mid-2013 as the 10 year Treasury moved from 1.50% to 3.00%. The more relevant historical precedent remains the late 1970s when oil and food shocks boosted inflation and yields increased to double digit levels, leaving bond and bond fund holders with negative real income returns and punishing capital losses.

Certificates of deposit do not bear the same risk. Should interest rates rise from their current levels and a long-term CD cease to produce competitive yields, investors usually have the option to withdraw the balance in part or in its entirely, forfeiting only an early withdrawal penalty calculated as a percentage of interest earned. The early withdrawal penalty will cut into some interest earned, but it can only reduce principle if one withdraws very early in the term.

Early withdrawal penalties among the most highest rate online issuers of 5 year CDs are as follows:

Synchrony Bank – 6 months

Barclays Bank – 6 months

GE Capital Bank – 9 months

CIT Bank – 1 year

Nationwide Bank – 1 year

EverBank – 15 months

A six month penalty only is particularly attractive. Synchrony Bank is currently offering 5 year CDs at 2.30%. An investor placing, say, $200,000 in such a CD with one of these banks would receive more than $24,000 gross over the next 5 years, compared to about $10,202 were the same monies invested in a 1% savings account.

See BestCashCow.com’s compound interest calculator

In 5 years, a 5 year CD will outperform a savings account and will have generated a decent premium over the savings account, should savings rates stay where they are. However, if interest rates were to significantly rise in one year, the investor could exit the CD, paying only a $2,300 early withdrawal penalty (six months interest), and still have their entire principle plus $2,300 in interest. Under such a circumstance, the effective return of the 5 year CD in the first year would be 1.15% - still better than any currently offered savings or one year CD rate.

Similar calculations show that yields on a five year CD can be still better than shorter term CDs in years two three and four, even when investors pay an early forfeiture penalty. In fact, the further away an increase occurs in interest rates in the United States, the better will be the positive impact on earnings from a 5 year CD with a six month withdrawal penalty. For example, the effective return of a 5 year CD held for 4 years may outperform that of a 4 year CD, even if the investor pays a six month early withdrawal penalty at the beginning of year 4.

The option that you are getting inherent in a CDs early withdrawal penalty is valuable. While rates may rise quickly over the next year, these options offer depositors significant safety and security that bonds and bond funds do not.

For these reasons, 5 year CDs are particularly compelling at this point. However, before making any purchases, you should always check to be entirely sure that you understand the early withdrawal penalty.

See the best 5 year CD rates here.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding BestCashCow in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Today's Highest Online CD Rates

Bank Product Term Interest Rate (APY)
Northern Bank Direct 1-Year 5.60% APY with $500 minimum
Finworth, a division of InsBank 1-Year 5.38% APY with $50,000 minimum
TotalDirect, a division of City National Bank of Florida 1-Year 5.35% APY with $25,000 minimum
Dollar Savings Direct, a division of Emigrant Bank 3-Year 5.00% APY with $1,000 minimum
First Internet Bank of Indiana 3-Year 4.66% APY with $1,000 minimum
IncredibleBank 3-Year 4.58% APY with $1,000 minimum
First Internet Bank of Indiana 5-Year 4.55% APY with $1,000 minimum
BMO Alto, a division of Bank of Montreal Harris 5-Year 4.50% APY with no minimum
Department of Commerce 5-Year 4.34% APY with $500 minimum

See More Online CD Rates →


  • Bob Bremen

    October 21, 2014

    Are, The point is a good one, but CIT Bank's 2, 3, and 4 year RampUp CDs provide you with the protection you are seeking and even less interest rate risk. I appreciate the site. Best, Bob

  • Sol

    October 22, 2014

    I would not put money in a five year CD. Oil prices are crashing and this will be a significant stimulus for the global economy. Oil prices will continue to fall as shale production in the US and Canada increases. Ebola is a tragedy in Africa but a media generated non-story in the united States. Lastly, by 2017 the deleveraging from the 2008 financial crisis will be over and this will be another positive for global and US economic growth. The positives for the economy in the future outweigh the negatives. In short, I will stay short and put my safe money into a savings or 1-2 year CD.

  • Uncle Frank

    October 22, 2014

    Staying with a laddered portfolio of certificates of deposit seems to be a prudent option over the long-term. Trying to anticipate when any significant rise in short-term interest rates will occur is futile, as we have seen.

  • Beverly

    December 24, 2014

    Having just run my own calculators for short-term vs long-term CD's, I came to the same conclusion as Ari that the 5-year CD is a very decent hedge against money invested in the market. For me, the early redemption fees are not so onerous as to keep me away from the 5-year in nearly all cases. I have an Advantage CD at CIT that allows me one opportunity to improve the rate with no interest penalty. This is probably similar to the current Ramp-Up CD as mentioned by Bob Bremen. There is just no way to know how soon or the speed with which the Fed will start increasing interest rates. Until rates are normalized, we all will just have to monitor and "manage" CD's to get the best outcome possible. I really love the site, the articles and the comments. Thank you.
    Beverly in Alabama

  • Grandpa Tom

    December 27, 2014

    Beverly: "I came to the same conclusion as Ari that the 5-year CD is a very decent hedge against money invested in the market."

    How can the 5-year CD be a decent hedge against money in the market? At most, the 5 year CD is now earning 2.40% according to this site. It might be a decent place to stash some cash you don't want to lose, but I don't see it has a hedge to the market.

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