Should You Really Be Buying 1-Year CDs Right Now?

I was at the gym yesterday and a friend who manages money for wealthy New Yorkers asked me if his clients (a married couple) should be putting $500,000 into a 1-year CD here and now at 2.00%.

He believes that with the stock market at an extremely elevated valuation and likely to correct, with the 10-year bond at 1.60% and yields likely to rise, and with little opportunity for appreciation in gold and other alternative assets, a one-year CD seems like a good place to hide out.

I quickly explained that 2.00% is not the highest one-year CD rate. You will find higher rates online here (hyperlink), and you may find still higher rates at banks and credit unions where you live.

Then, I turned to the cash versus CD discussion.

For some time, I have recommended one-year CDs as a way to improve your return on cash that you want to keep liquid but know that you will not need for over a year. As the Fed was increasing rates and the expectations was for further increases, the spread between CDs and savings was also increasing. This time last year, the best online savings rates stood around 2.30% and one-year online CDs were around 2.85%.

While BestCashCow’s surveys still reflect a wide spreads nationally (see the chart on the top of our online one-year CD page), the highest online savings rates are not much below the best one-year CD rates today.

Savings is always going to give you more flexibility. It can be accessed without penalty in an emergency. It can be deployed instantly should you see a market opportunity or some sort of other opportunity. So, I think that there is a strong argument for holding cash in savings or No Penalty CDs here and not now buying new short-term CDs (or allowing short-term CDs to auto-renew).

At the same time, I’ve always argued that there is very little risk in a one-year CD. You are never very far from maturity, and the standard early withdrawal penalty on one-year CDs is only three months’ interest (but, you should always check on the early withdrawal rules and fees before buying a CD). And, while it is hard to get excited about the narrowing margin, there is a real risk as we work through 2020 that President Pence will try to raise money from real estate developers and try to force Fed Chairman Jerome Powell to continue to lower the Fed Funds rate to zero (as Trump did).