CD Laddering is A Tried and True Strategy, but Untested in the Current Environment

Following the Fed’s rate increase yesterday – only the second in over a decade – this is a very bad time to be buying long term CDs, even if it is in conjunction with a strategy of buying short term ones.

BestCashCow is a website that provides people with CD and savings rates details (as well as mortgage rate and credit card information). Our position is that people should have a substantial amount of their retirement assets in safe places. With the stock market pushing 20,000, a safe place is not the stock market. And, with interest rates at historic lows at the end of what has been an unprecedented decade, municipal bonds and other long-term fixed income assets are not a safe place either.

One of our longstanding competitors – and in fact a competitor who we have always held in high esteem - published a commentary explaining that following the Fed’s increase in the Fed Funds rate to 50 bps, depositors continue to be well advised to seek out a CD laddering strategy. We at BestCashCow disagree.

Other than the fact that Fed Chair Yellin’s commentary and her disposition remain dovish, every reasonable indicator is suggesting that interests rates will be dramatically higher in 1 year (the Fed itself is guiding towards a Fed funds rate of 1.25% in 12 months). To boot, Trump and Mnuchin are going to remove regulation on small and medium sized banks, creating more competition for your money in the very near future.

We believe that the laddering strategy is tried and true and recommend it generally in our e-Book on CDs. However, this is an unusual time where rates are low and certain to rise, as soon as early in 2017. Therefore, even with short early withdrawal fees (which our competitor points out that banks may not honor), any CD over 1 year is simply not attractive against the backdrop of an imminent reversal in our decades-long period of unreasonably low interest rates.

Cash rates still may not be sexy, but you are not getting enough of a time premium or a risk premium at this moment to be laddering beyond 1 year.

Hint: The best 5-year CD rates were over 2.30% less than 18 months ago. Don’t even consider 3, 4, or 5 year CDs until you see 5-year CD rates at or above that level again.

See the best savings rates here and the best 1-year CD rates here.