These Banks Are Cutting CD and Savings Rates. Where to Put Your Money to Earn Returns
With the Federal Reserve’s interest rate target looming, investors may soon see the attractive yields on their cash begin to decline. In fact, banks have already started cutting their payouts. Last week, three online banks cut their one-year CD rates, according to BTIG. The biggest drop came from Capital One, which cut its CD rate by 50 basis points to 4.5%. One basis point equals 0.01%. Goldman Sachs’ Marcus cut its rate by 15 basis points to 5%, and Sallie Mae cut its CD by 5 basis points to 5.1%. Meanwhile, Synchrony cut its online savings rate by 10 basis points to 4.65%. Federal Reserve Chairman Jerome Powell said after the central bank’s July meeting that a rate cut in September is “on the table.” The market is pricing in at least a quarter-percentage-point cut at that point, according to the CME FedWatch Tool. As banks prepare for the Fed’s move, they’re focusing more on cutting CD rates, which are fixed for the life of the product, BTIG analyst Vincent Caintic wrote in a note Sunday. “We believe online banks are deliberately shifting customers to savings rates, which are floating rates, rather than term rates,” he said. “With greater confidence in a Fed rate cut (and possibly multiple by year-end), we think online banks will be more confident in cutting deposit rates in the coming weeks,” he added. What to do with your cash There are a number of ways to maximize your cash yield. First, consider not only the interest rate you’ll get but also how much liquidity you need, says Christine Benz, director of personal finance and retirement planning at Morningstar. “The returns are somewhat ephemeral—what we’re offering today may not be available in three months,” she says. While buying a CD is a good way to lock in an interest rate, you’ll lose liquidity and pay a penalty if you need to access that money before the end of the term. If you need the option of immediate access, high-yield savings accounts are often your best bet for immediate liquidity, Benz says. You can also consider money market funds. The seven-day annual yield on the Crane 100 list of the 100 largest taxable funds is 5.11% as of Monday. Interest rates can fluctuate with both high-yield savings funds and money market funds. Another thing to consider is whether you want to be insured through the Federal Deposit Insurance Corporation. CDs and savings accounts are typically FDIC insured up to $250,000 per depositor, while money market funds are not. Benz says one way to address liquidity and lock in some yield is to do a CD ladder, if you’ve already determined your cash needs. For example, you could buy a 3-month, 6-month, and 9-month CD to get different maturity dates. Another option for wealthy investors is a municipal bond fund, which is not subject to federal taxes, she says. For Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, a laddered asset allocation makes the most sense for her clients. “This helps clients get some liquidity because in most cases they don’t have a direct need for the money, but they like the idea of having some liquidity,” says Sun, a member of the CNBC Financial Advisors Council. Money market funds are part of every ladder she creates. She then moves on to brokered CDs, which are offered through brokerages rather than banks, and in some cases, municipal bonds, if the investor is in a higher tax bracket. She has purchased brokered CDs with varying terms up to 1.5 years. Certified financial planner Cathy Curtis, CEO of Curtis Financial Planning, breaks down her cash based on her needs. She’ll keep a month or two of expenses in a bank savings account for easy access, even though the returns are minimal. Then she’ll keep another six months of expenses in a high-yield account. While she recommends high-yield savings accounts in a rising-rate environment, she’s changing that up a bit—depending on cash needs. “With the Fed likely to cut rates starting in September, it makes sense for clients to look at CD or T-bill rates that can be locked in for a year or longer,” says Curtis, who is also a member of the CNBC Financial Advisors Council. But if they need money right away, she suggests a high-yield savings account. Curtis has also used money market funds and floating-rate Treasury exchange-traded funds for clients to get some of their fixed-income allocation. But she’s starting to reduce those allocations and is moving into aggregate bond ETFs and variable-income ETFs, as well as 1- to 2-year Treasury notes, in anticipation of rate cuts.
