By Richard Barrington
Low interest rates have made recent years a bleak time for certificates of deposit (CDs). But as interest rates start to rise, expect CDs to gain new life. In fact, if bank rates follow the pattern that yields in the bond market have already begun to set, CD rates may be the first deposit rates to benefit from rising interest rates.
The turnaround in ratesIn the bond market, the rise in interest rates has begun in earnest. Rates began to rise in May, and then rose more sharply in June, with longer-term bond yields rising much faster than short-term yields. From May 1 to July 5, 30-year bond yields rose by 85 basis points. The increase in one-year bond yields over that same period was just four basis points.
Expect banks to protect their profit margins by being slower to raise deposit rates. But when rates do start to rise, don't be surprised if they follow the pattern of the bond market, with longer-term rates, such as five-year CD rates, rising the fastest.
Strategies for capturing higher CD ratesJust as interest rates fell steadily over a period of a few years, once rates start to rise it may take some time for them to continue their climb. Therefore, at this time it's not so much a question of planning for a higher rate environment, but for a dynamic rate environment in which rates are moving higher. Here are some strategies for getting the most out of CD rates as they climb:
Rising interest rates can make choosing CDs a little trickier. But after a sustained stretch of sub-1 percent CD rates, depositors will welcome the challenge once rates finally start to rise.