But don’t go to your local mega bank. Look for better deals.
By David Enna, Tipswatch.com
For years, CD rates offered by banks and credit unions — even the aggressive online versions — have been stubbornly lower than rates paid on short- and medium-term U.S. Treasurys.
Less than a year ago, in July 2022, I noted that Treasury bills had a nice advantage in yields over CDs, with the 1-year yielding 2.79% versus about 2.0% for best-in-nation bank CDs. When I came back to this topic in September 2022, the 1-year was up to 4.03%, much higher than the best bank CDs at 3.1%.
Now this has changed. The U.S. banking system has been roiled by two major bank failures in recent weeks, an event that followed months of deposit outflows from banks to higher-yielding Treasurys and money-market funds. This is from a recent USA Today article:
With some jittery depositors shifting their money from regional banks to large ones, at least some banks are lifting their savings account and CD rates to incentivize customers to stay put or to attract new money to replenish reserves, analysts say.
“It’s likely that concerns about maintaining deposit levels have put upward pressure on some deposit rates at some banks,” says Ken Tumin, founder of DepositAccounts.com, which tracks bank savings and CD rates. Banks, he says, want to “shore up their deposits to reduce the odds of being hurt by a bank run.”
In this current climate, banks and credit unions are looking to build up deposits and many are aggressively promoting attractive CD rates. For example, this offer from N.C.-based Truliant Federal Credit Union has been appearing in full-page ads for several days in The Charlotte Observer.
My wife and I happen to have a small savings account at Truliant (a remnant from ages-ago CD offers) and so I thought: “Why not?” Within a day, we had nabbed the 23-month CD paying 5.35%. I was especially interested in this offer because of the longer term, 23 months. My thinking: It’s possible we have reached a peak in U.S. interest rates. If that’s true, I want to lock in good rates for a longer term.
Another positive … this is proof that newspaper advertising still works.
Let’s take a look at the current state of shorter-term interest rates, across all the safe options. I’ll use this Truliant offer as an example for 1- and 2-year CDs, but you probably can find slightly higher rates around the nation.
- 2-year bank CD: 5.35%
- 1-year bank CD: 5.35%
- 26-week Treasury bill: 4.94%
- 13-week Treasury bill: 4.85%
- 4-week Treasury bill: 4.74%
- Vanguard Treasury Money Market: 4.70%
- 1-year Treasury bill: 4.64%
- 5-year bank CD: 4.50%
- 2-year Treasury note: 4.06%
- 5-year Treasury note: 3.60%
What’s interesting is that shorter-term Treasury yields have been falling 50 basis points or more over the last month, at the same time CD rates are rising. The yield on a 2-year Treasury note, for example, fell from 4.89% on March 1 to 4.06% on March 31. Here is a chart showing the two-year yield trend for 2- and 5-year Treasury notes, showing the recent declines at a time of rising CD rates:
How to find up-to-date offers
One thing for sure: You have to be picky when investing in CDs. For example, Bank of America is currently paying 0.03% for a 1-year CD. (And this offer is only good through April 2! Thanks for the April Fool’s joke, BofA.) But the sad thing is that Chase and Wells Fargo are offering even less: 0.01%. These monster-sized banks don’t want or need your money.
So, where to look for something better? In the “old days” I would go to BankRate.com to find CD and savings rates. I still use it at times, but a better option is DepositAccounts.com, which does a great job of presenting unbiased information. For example, on its homepage, you can learn that the top 1% of 1-year bank CDs are paying 5.17% and the national average is 2.87%.
Here is information I found on Friday for best-in-nation 2-year CD rates.
Are credit unions off limits?
Note that several of the higher-paying institutions are credit unions, which can present tricky problems in opening an account. Ken Tumin of DepositAccounts.com notes: “All credit unions are required to have a field of membership which defines a common bond for members.” But for many institutions, which Tumin calls “all-access credit unions,” there are ways of “joining the club.”
Tumin has compiled a list of these all-access credit unions, along with information on how you can qualify.
Read the fine print
Many attractive bank and credit union CD offers will have minimum investment limits and most will have early withdrawal penalties. In the case of the Truliant offer, the minimum investment was $10,000, which had to be new money coming into the credit union. Here are Truliant’s early withdrawal penalties, which look standard:
- Term of at least 7 days but less than 12 months: 90 days of dividends or dividends since opening/renewal, whichever is less
- Term of at least 12 months but less than 48 months: 180 days of dividends or dividends since opening/renewal, whichever is less
- Term of 48 months or longer: 365 days of dividends or dividends since opening/renewal, whichever is less
What about brokered CDs?
In recent months I’ve had several readers report they’ve found great deals on brokered CDs, which are purchased through a brokerage instead of directly from a bank. These are tricky investments, because many offer great rates but are callable after a short period of time. Also, these investments do not reinvest the interest, so there is no compounding over time.
It takes hunting to find good deals. For example, here are the best brokered CDs available on Vanguard’s trading platform on Friday morning. None of these are particularly attractive, and the top two 5-year CDs are callable after several months.
Brokered CDs have the same FDIC insurance as any direct issue from a bank, up to $250,000 per bank (or whatever the Fed decides this week.) This makes brokered CDs particularly attractive for high-wealth investors, because they can spread $250,000 investments across many banks without opening individual accounts. Plus, there is a secondary market for the CDs and no penalty for exiting early.
The hassle factor is lower with brokered CDs. I understand the appeal. The reason the Truliant offer was attractive and easily available was: We already had an account there. Would I have been willing to open a new account elsewhere? Maybe not.
State income taxes
If you live in a state with a high tax on income, realize that the tax will reduce a CD’s yield advantage over a U.S. Treasury, which is free of state income taxes. That won’t matter in a tax-deferred account, however.
Final thoughts
Over the last decade-plus of ultra-low interest rates, at times I was able to leap into 5-year CDs paying 3%. I considered those major investing victories. Now I’d really like to find a 5-year CD paying 5% or higher. No luck. So I grabbed the 23-month CD last week. It’s not a life-changer, but getting 5% on my money just feels good.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
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