Keep your sweetened CD yields going with this maneuver

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Early-bird investors who locked up their cash in certificates of deposit late last year could be coming up on a huge opportunity for sweeter yields. The Federal Reserve kicked off its campaign of higher interest rates in March 2022, which had the pleasant side effect of raising yields on Treasurys, money market funds and CDs. The one-year Treasury bill is yielding 5.47% Wednesday, and one-year CDs at some institutions offer annual percentage yields exceeding 5%. Investors who locked in short-dated CDs at a higher rate last year could be approaching maturity and have to make an important choice: renew their CD – and potentially receive a yield bonus – or take their cash and shop around. “It always makes sense to look at the landscape,” said Danika Waddell, a certified financial planner and founder of Xena Financial Planning. “If you get an extra five basis points [on your yield for renewing], go back and revisit what the other banks are offering.” Higher rates Since the Fed’s first rate hike of this cycle, the average highest rate paid on CDs has climbed 465 basis points, according to an analysis by Morgan Stanley. A basis point is one one-hundredth of a percent (0.01%). Banks themselves are grappling with a conundrum as they face the prospect of interest rates staying higher for longer: They’ll incur higher deposit costs as they compete with money market funds and as CDs reprice at higher rates. “So far in 3Q23 earnings season, JPM, PNC, and WFC all pointed to further pressure on deposit pricing going forward, given continued mix shift and repricing across certain pockets of the deposit book,” said Morgan Stanley analyst Betsy Graseck in a Monday report. But there are reasons why banks might feel compelled to keep those deposits, even as attracting those dollars becomes more costly. “The variables out there include those institutions that want to raise capital for regulatory reasons,” said Mark Hamrick, senior economic analyst at Bankrate.com. Generally, investors have a 10-day grace period when their CD matures to decide how to proceed: They can withdraw the money and buy a new CD, walk away with their sum or allow the CD to renew. Ally Financial and Bread Financial are among the institutions offering a higher renewal rate for customers who stick around. Bread’s 1-year renewal CD has an APY of 5.65%, compared to the 5.60% rate it will pay for new 1-year CDs opened today. Consider that about a year ago, the average one-year CD had an APY of less than 1%, according to Bankrate.com . Factors in your decision If your CD is approaching maturity, take a moment to get familiar with the details of how your bank handles renewals. “Some renewals basically suggest that the CD will automatically be renewed beyond a certain grace period, and that’s where the saver needs to be aware of what the fine print includes,” said Hamrick. It’s also a good time to check in with your priorities for the money. Waddell noted that late last year and in early 2023, clients put some of their assets into T-bills and CDs. But as these terms end, they discuss the longer-term plans for that cash. “In that three- to five-year range, it’s really hard to argue against CDs, so these are some of the conversations we have with clients,” Waddell said. She noted that if the client’s horizon is beyond that five-year period, some of those dollars in maturing instruments could go toward bond funds instead. Liquidity and safety are also factors. CDs have the benefit of locking in a rate for a set period of time – and the Federal Deposit Insurance Corp backs these instruments to the tune of $250,000 per depositor, per bank and per ownership category. However, you forfeit some of your interest if you “break” the CD ahead of maturity. No-penalty CDs could be a viable option for savers who want a safe place to stash their emergency reserves, as well as the option of withdrawing the money if it’s necessary, Waddell said. The trade-off is that the rate will be lower. Consider that Synchrony Financial has an 11-month no-penalty CD that offers a 4.5% APY, while its 12-month standard CD yields 5.1%. “The knee-jerk reaction of accepting a renewal isn’t the best move,” said Waddell. “If you’re going to lock up for five years, you may as well get the better rate.” – CNBC’s Michael Bloom contributed to this story.