Some 1-Year CDs Are Still over 2% APY Following the Coronavirus-Induced Fed Cut

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.