The 10-Year Crosses 3% - As Public Interest in CDs Increases, Avoid Brokered CDs

The 10-Year Crosses 3% - As Public Interest in CDs Increases, Avoid Brokered CDs

Rate information contained on this page may have changed. Please find latest cd rates.

I have come across a lot of people recently who believe that this is the time to lock into long-term CDs now that the US 10-Year Treasury has crossed 3%.   I believe that both short-term and long-term interest rates will be much higher at the end of 2019 as the Fed continues to raise the Fed Funds rate.   I would not encourage anyone to buy anything longer than a one-year CD.

Even if you disagree with me and insist on buying long-term CDs now, you must protect yourself from the possibility of dramatically higher interest rates within the next year or two.  You do this by looking for only those CDs that have the most reasonable early withdrawal penalties. 

Learn more about early withdrawal penalties and the possibility, albeit remote, that a bank or credit union may refuse to allow early termination of a CD, even with payment of a penalty, here.  You should also read our 65 questions to ask if you are new to CDs before making any purchase.

About 4 years ago, I wrote an article advising people to avoid fraudulent websites offering too-good-to-be-true brokered CD rates

Someone purporting to be a financial advisor commented on the article yesterday advising that their brokerage now, for the first time, offers 5-year brokered CDs that are higher than the highest rates shown on this site.  While the comment is not germane to the article on which it was placed, I want to address it.

First, the rates that the commenter cites are not higher than rates shown on BestCashCow.  I’ve reviewed the brokered CD rates offered by Morgan Stanley and Merrill Lynch this morning.   Neither is offering a 5-year brokered CD above 3%.  They are both offering 10-year brokered CDs at 3.15% (you should absolutely avoid anything longer than 5 years).

Second, in addition to online CD rates, we also show local rates and credit union rates.   Depending on where you live, you will likely now find 5-year CD rates that are above 3.00% on BestCashCow.

Third, if you are going to fight the reality of rising interest rates, you need to give yourself the best ability possible to get out if you need the money or are wrong about the direction of interest rates.  Brokered CDs do not have early withdrawal penalties.  If you need to exit a brokered CD early, you are dealing with a secondary market, and that basically means that you are selling to the brokers at their ask price.  If you buy a 10-year brokered CD from your broker now at 3.15% and need to exit it in 18 months, you will likely take a huge bath.   Even if you buy a 5-year brokered CD at 3%, you are going to lose a lot of money.

Brokered CDs have a very different risk profile from online or bank or credit union-issued CDs.   If you want to take that bet that they offer on rates, then you should buy bonds (which we also don’t recommend).     


I Bought a Long-Term CD and Rates Have Moved Higher, What Should I Do?

I Bought a Long-Term CD and Rates Have Moved Higher, What Should I Do?

Rate information contained on this page may have changed. Please find latest cd rates.

As interest rates have moved up on longer-term CDs, many have found themselves in a quandary over what to do about longer-term CDs that they may have purchased over the last couple of years and that are now yielding less than the going rate.

In fact, I myself find myself in such a position, having purchased a 5-year CD from a major online back 2 years ago at 2.25%.   With BestCashCow now showing 3-year CD rates at 2.60% and with the ability to get out of the CD with a 6-month early withdrawal penalty, I can already cover my losses from the penalty by rolling into a higher yielding CD.

With rates points to rise still further, this strategy locks into one early withdrawal penalty and runs a high risk of a second one.   It accomplishes little other than a psychological benefit of allowing me to feel like I am still getting the best CD rate.

Since rates may rise further between now and the end of the year, and still further into next year, I have chosen to adopt a separate strategy.   My strategy involves resolving, as I have, that I will ultimately need or want to terminate the CD that is earning 2.25% before the end of its term three years from now.   That will cost me 6 months of interest (or 1.25% the initial CD price) whenever I pull the trigger.    But, rather than do this now and risk getting another CD which may quickly wind up paying below the best rates, I have decided to treat this outstanding CD as if it were cash or a short term CD.  Since 2.25% is still better than what I can get in a savings or a one-year CD, I will hold the CD for now.

When savings and short term CD rates have moved meaningfully above 2.25%, I will reconsider my position (unless there is only a very short period left of the CD at that time).

This situation underscores the importance of looking for CDs with reasonable early-withdrawal penalties.   We consider 3 months of interest to be a reasonable penalty on a 1-year CD and 6 months of interest to be a reasonable penalty on a CD longer than 1 year.   Also, as we noted in this article, the bank or credit union’s terms may grant it discretion whether to honor your early withdrawal request.   You can lessen the risk of an early withdrawal being denied by only opening CDs with larger, recognized online banks.


The Return of the 6-Month CD

The Return of the 6-Month CD

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I am only in my forties, but I have been told by my seniors of an era of largely stable interest rates when 6-month CDs offered depositors the ability to earn a premium over savings or money market rates, without the burden of locking up their money for as long as a year.

Of course, it makes sense in any environment where interest rates are stable or increasing that depositors would be rewarded, albeit marginally, for locking up their money for 182 or 183 days.   However, in the post-2008 period, of course, depositors have not seen 6-month CDs that offer a premium over savings rates.   Even over the last several years when savings and money market rates have been slowing moving up as the Federal Reserve raised the Fed Funds rate from zero to 1.25%, the best 6-month CD rates have been largely below the best savings rates. 

With consensus estimates that the Federal Reserve is poised to raise interest rates 3 or 4 times in 2018, last week we finally saw the emergence of 6-month rates that are better than the best savings rates.  

As of this writing, the best online savings rate is 1.80% and the best 6-month CD is 1.95% APY.   (Local rates where you live may be higher.  Check local bank savings rates here, and local credit union savings rates here.   See local bank 6-month CD rates here and local credit union 6-month CD rates here).

We don’t believe that a 15 basis point premium over savings is worth chasing.  Over 6 months, it amounts to 7.5 basis points which after tax is about 4 basis points.  In other words, you are looking at a gain of $100 on $250,000.

Nonetheless, for many people who would otherwise consider short-term CDs, but have shied away from locking up their money for periods of 1 year or longer, the return of the 6-month CD is an interesting development.