1-Year CD Rates from Online Banks 2024

We’ve read and heard a lot of financial markets information since the Federal Reserve’s emergency rate cut last Tuesday in response to the spread of Coronavirus.

By the end of the week, 10-year US Treasuries were trading under 70 basis points.

I’ve seen articles recommending people buy US Treasuries. Although we did not anticipate Coronavirus or anything like it in the fall and warned then against long-term bonds, we continue to highlight extraordinary risks to principal in long-term low yielding instruments should rates rise before maturity. Hence, US Treasuries are inappropriate now for non-institutional investors.

Likewise, this article in a well-respected publication over the weekend caught my attention. In the first half of the article, the author is citing an opportunity in Series EE and Series I bonds. These US government instruments are fully detailed here, but because of the limits they are inappropriate for most. (Also, those with accounts at Merrill and Morgan have access to other, higher yielding instruments that are tied to CPI-U).

The second half of the same article cites what the author seems to believe is an extraordinary opportunity in municipal bonds. The author points out that, for those in the highest tax brackets, a 10-year municipal trading at 90 basis points has a tax equivalent yield of almost 1.40%, but fails to point out the illiquidity of municipals, that this illiquidity causes still greater risk to principal should rates rise over the course of the bonds (and they will), or that some (perhaps many) municipalities will face credit problems the longer the Coronavirus crisis lingers.

There may be a temptation to believe that interest rates are going to be low forever when you watch the incompetent response of the Trump Administration. But, in one year, you could easily be looking back at your actions as having been too rash.

Think about whether you really want to make a bet that interest rates in the US are going to be low forever.

If you believe that Gilead and our medical professionals are going to get a handle on this crisis over the next year, you should be buying 1-year CDs. With many on offer still above 2%, this is a much more sensible place to let your assets hang out. And, in the worst case, you’ll be liquid in a year.

Check online CD rates here.

Compare local CD rates where you live here.

I was at the gym yesterday and a friend who manages money for wealthy New Yorkers asked me if his clients (a married couple) should be putting $500,000 into a 1-year CD here and now at 2.00%.

He believes that with the stock market at an extremely elevated valuation and likely to correct, with the 10-year bond at 1.60% and yields likely to rise, and with little opportunity for appreciation in gold and other alternative assets, a one-year CD seems like a good place to hide out.

I quickly explained that 2.00% is not the highest one-year CD rate. You will find higher rates online here (hyperlink), and you may find still higher rates at banks and credit unions where you live.

Then, I turned to the cash versus CD discussion.

For some time, I have recommended one-year CDs as a way to improve your return on cash that you want to keep liquid but know that you will not need for over a year. As the Fed was increasing rates and the expectations was for further increases, the spread between CDs and savings was also increasing. This time last year, the best online savings rates stood around 2.30% and one-year online CDs were around 2.85%.

While BestCashCow’s surveys still reflect a wide spreads nationally (see the chart on the top of our online one-year CD page), the highest online savings rates are not much below the best one-year CD rates today.

Savings is always going to give you more flexibility. It can be accessed without penalty in an emergency. It can be deployed instantly should you see a market opportunity or some sort of other opportunity. So, I think that there is a strong argument for holding cash in savings or No Penalty CDs here and not now buying new short-term CDs (or allowing short-term CDs to auto-renew).

At the same time, I’ve always argued that there is very little risk in a one-year CD. You are never very far from maturity, and the standard early withdrawal penalty on one-year CDs is only three months’ interest (but, you should always check on the early withdrawal rules and fees before buying a CD). And, while it is hard to get excited about the narrowing margin, there is a real risk as we work through 2020 that President Pence will try to raise money from real estate developers and try to force Fed Chairman Jerome Powell to continue to lower the Fed Funds rate to zero (as Trump did).

Interest rates have collapsed over the last several weeks and that may be good news for those interested in remortgaging or buying a new property. It is also good news for anyone considering taking out a new home equity loan or line of credit or an auto loan.

It may not be good news for your savings. Many banks dropped their online savings rates going into the July rate cut and still others are dropping their rates now based on the assumption that the Fed is not done cutting.

We are getting a lot of notes from savers who remember well a lengthy period from 2009 to 2016 when savings rates were below 1%, and are terribly fearful that we may be heading back there. Indeed, anyone looking at Japanese or German rates and watching the talking heads on CNBC or Bloomberg can get the feeling that there is a real paradigm shift and that interest rates are never going up.

There are still banks and credit unions that are offering online 5-year CDs over 3%. In your local market, you may even find brick and mortar opportunities at banks and credit unions to get these kinds of rates.

Here are two reasons why you should be cautious.

First, we’ve seen a panicked move in Treasuries. Rates may not stay this low for very long. We could be in a completely different environment in a year or 18 months with the 10-year back over 3% and perhaps even with the Fed Funds rate back over 3%. If that happens, you will regret having limited your liquidity by locking into a long-term CD.

Second, even if rates go back to zero, you are still going to see attractive 5-year CD offers as banks will still need to lock up long-term deposits from depositors to fill their capital needs. From 2011 until 2015, while the Fed Funds rate was at zero and the best savings rates were below 1%, it was still always possible to find 5-year CDs at or just under 2.50%. So, even if we see a continued complete collapse in interest rates, you will always be able to get a premium for locking in for a long period. And, yes, there is a difference between 2.50% and 3.50%, but the difference is not a matter of life or death (especially after you calculate the net income from the CD after tax).

If you see 5-year CDs as a sort of insurance against collapsing rates, then you can go ahead and devote a small amount of your savings to provide some level of protection against falling rates (be sure to check the best rates here). But, we’d be much more inclined to direct that energy towards one-year CDs where the rates may be slightly lower, but so is the risk of getting this wrong.