The days of earning 5% or more on nearly risk-free certificates of deposit (CDs) are coming to an end, but as banks and other financial institutions call back CDs early, expectations for some are rising. It may end sooner.
A callable CD gives the bank or brokerage the right to redeem the CD before its maturity date. You are more likely to call a CD when interest rates are falling. Financial institutions do not want to pay higher interest rates if prevailing interest rates fall.
Seeing as the Fed began its rate cutting cycle in September, experts expect more CDs to be called in the coming months. The Federal Reserve lowered its short-term benchmark federal funds rate by 0.5 percentage points from a 23-year high for the first time in more than four years. It is expected that interest rates will continue to be lowered until next year.
“It’s simple math,” said Sean Mason, principal investment adviser at Fresno Financial Advisors. “If a CD payment is 5% and the interest rate goes down, and the CD rate is 3%, the banks don’t want to pay 5% anymore. They are also receiving lower interest rates (on loans) than before. Therefore, in an environment of falling interest rates, the probability of a CD being called increases.
Are all CDs recallable?
Experts say savers should check the terms of CDs, especially high-yield ones, because not all CDs are callable. Issuers typically pay higher yields on callable CDs than on traditional CDs because of the risk of early redemption.
Take advantage of high interest rates: Today’s best CD rates
“Recallable CDs have fine print that you need to read and understand,” said Mary Grace Roske, spokeswoman for CD price comparison site CDValet.com. “Savers who use CDs for predictable returns may be surprised when their CDs are called, abruptly ending the big returns they were expecting.”
A callable CD must include a non-callable period or the first time the CD cannot be called. For example, a 5-year CD may have a 1-year call protection period.
You’ll also need to set up a phone schedule, or times when your bank or broker can call your CD. Call dates are typically every six months, but are subject to change.
Will there be a century?: The 100-year CD puts a new spin on long-term investing. is that a good idea?
What if my CD is called?
When the CD is called, your initial deposit and any interest earned up to that point will be refunded.
“But you lose out on the interest you would have earned had the CD matured,” Roethke says.
What should I do if my CD receives a phone call?
Experts say don’t panic and start looking for other investment opportunities right away.
“If you get a call for a CD, you’ll want to immediately consider other savings options and choose the one that best fits your goals so your funds don’t go to waste,” Roethke says.
Savers can initially stash their money in a money market account and earn interest rates of 3.5-4.5% while they figure out their next move, but that interest rate “doesn’t last,” so people Mason says they need to act quickly.
Mason suggests annuities or U.S. Treasuries if savers want to maintain a similar risk profile to CDs.
Annuities through life insurance companies can provide the same returns as CDs, and come in terms of two, five and 10 years, which are also similar to CDs, he said. The downside is that pension withdrawals above the agreed-upon amount can mean stiffer penalties than cashing out a CD early, he said.
For example, if you sign up for two years, your annuity can pay 5%. Contractually, you may be able to withdraw some money each year, but if you’re in a termination period, “if you need more, you might be charged a 10% penalty on the balance,” Mason said. . A redemption period is a period during which an investor cannot withdraw funds without paying fees or surrender charges.
U.S. Treasuries, virtually risk-free government bonds, still pay 4% to 5% interest depending on their length to maturity. Investors can hold to maturity to recover their entire investment, collecting periodic interest coupon payments, or sell through banks, brokers, or dealers prior to maturity. You may have to pay transaction fees and the price you get depends on Treasury demand. “If the Treasury pays 4% and interest rates go down to 2%, you might be able to sell it for more than you paid,” Mason said.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
