With the Federal Reserve busy nudging interest rates higher, savvy savers are taking a fresh look at certificates of deposits.
These once-stodgy savings tools, which had fallen out of favor when interest rates hit rock bottom, are getting investors psyched again about stashing away their cash. Today, the amount of money invested in traditional CDs now exceeds $1 trillion — an 18 percent increase over last year and a 27 percent gain since the Fed started to raise rates nearly two years ago.
“The interest rates are better than you're getting in a savings account or stocks that you don't trust,” said Janet Rigoletto.
As the Fed raises short term interest rates, banks can deliver a higher return on the money you put into your CD. Higher term rates may be bad if you’re shopping for a mortgage, but they're great for savers.
“In rising interest rate environments, (savers) tend to ladder out in three, six and 12-month increments,” said Jeremy Hoover, a financial consultant at Charles Schwab. “As the Federal Reserve raises rates, they're able to get higher yields when those CD's mature.”
The average yield on a one year CD is over 3.5 percent. That's the highest since August 2001, and about two percentage points higher than June 2004, when the Fed started raising rates.
“To be able to lock in those kinds of returns — without risk — is attractive to investors at a time when bond investments are lucky to be break even,” said Greg McBride, an analyst with Bankrate.com, which tracks CDs and other consumer interest rates.
The increased excitement about CDs these days has banks battling each other to offer more attractive yields. Though the average yield on a one-year CD is over 3.5 percent, some banks have one-year CDs yielding 5 percent.
“That difference of roughly 1.5 percentage points is enough to generate $150 in interest income that you'd otherwise leave on the table with a $10,000 investment,” said McBride.
But even with 5 percent yields on one-year CDs, some folks still aren't sold.
“If you told me I could get 15 percent investing in CDs then I would probably do so,” said Josh Mathews.
Some investors want to stay aggressive.
Keep in mind, you don't need to tie up your money for long. Bankrate.com lists several banks offering three month CDs yielding over 4.5 percent.