Interest Rates Rise: What it Means for CDs

Over the last two days, we have seen the 10 and the 30-Year US Treasury rates move higher. The financial media is saying they “spiked” but the 10-year US Treasury is now at 3.20% (from 3.00%) and the 30-year US Treasury is now at 3.45% (from 3.15%) that I don’t think represents a spike.

I have been saying for some time that we will see much higher interest rates in the US. I first warned against all fixed-rate bond holdings in September 2017 when the 10-year US Treasury was at 2.10%, see this article). You should to continue to avoid bonds, except those that have escalation clauses or those that otherwise produce more interest as long-term bonds rise.

Those who read the BestCashCow newsletters will note that I have strongly encouraged depositors to buy short-term CDs (one year or less) over long term CDs, and expressed a preference for savings and money market accounts over CDs.

CDs at well-recognized online banks provide not only guaranteed income over the life of the CD, but usually allow for early withdrawal with the payment of a penalty (often, the right to allow early redemption even with the payment of the penalty is retained by the bank, so we urge caution here, especially with lesser known or less financially stable names. Learn more here. {https://www.bestcashcow.com/can-you-always-withdraw-your-money-early-from-a-cd.html}).

Even if you can get out by paying a fee, if rates are going up, you still want to avoid locking in at this time.

We think inflation is here. We think interest rates could be dramatically higher in a year. We are seeing savings and money market rates over 2% at banks nationally and in most local markets and at credit unions. While 1-year CD rates at 2.65% look attractive now, we are betting that you will see savings and money market rates at or around these levels shortly.

Bottom line: Exercise caution vis-a-vis all CD purchases at this time.