Certificates of deposit have long been seen as safe investments. That’s not surprising. They come with FDIC insurance and allow you to lock in at your starting rate, so you’ll always know exactly how much your money will earn.
Right now, though, CDs are doing something that’s very unusual. This phenomenon could present a once-in-a-generation opportunity to earn a really great return at an even lower risk than normal. Here’s why.
It’s been decades since CDs have done this
For the last 35 years, one key fact has been true of CDs. If you wanted to get the best possible return on investment, you had to buy a CD with a longer term. For example, 5-year CDs had higher yields than 6-month CDs.
You took on more risk by buying these 5-year CDs, as you had to agree not to access your money for the entire duration and to pay a penalty if you did.
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So, you were risking not being able to use your funds if surprise costs came up. You also took the risk that you’d be stuck in a CD for a long time at a low rate if interest rates went up shortly after you bought it.
Something changed in May of 2023, though. For the first time since 1989, 6-month CDs suddenly started offering higher yields than 5-year CDs. The yield curve flipped, and you could now get a better return on investment (ROI) if you tied up your money for a short time rather than for a long time.
Why is this such a great opportunity for investors?
With short-term CDs now offering a better ROI than long-term CDs for the first time in decades, investors have a chance to do something unprecedented.
You can now agree to tie up your money for just a few short months and earn an ROI upward of 5.00%. That’s a really great rate when you are taking on almost no risk. You’ll have your cash back very quickly in the event that you find you need the funds or in the event that interest rates continue to increase.
This is an unusual phenomenon, and it’s occurring because rates skyrocketed during the COVID-19 pandemic — but the Federal Reserve has signaled it will lower the benchmark interest rate as soon as inflation slows. This could be as early as September. Banks are offering competitive yields because rates are high now, but don’t want to offer them for long since it’s so clear rates will fall soon.
With this once-in-a-generation opportunity available now but likely to disappear once the Fed begins rate cuts, it’s worth putting some money into a 6-month CD if you won’t need it for that period of time. You can earn upward of 5.00% on your investment and have your money back (plus interest!) before you know it.
If you don’t act now, you may not get this chance for another couple of decades or so if past history is predictive. You could regret missing your chance to earn some easy money.
