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The Current CD Quandary

The Current CD Quandary

| September 11, 2017

The Current CD Quandary

Economists thought inflation would pick up. Guess again.


Provided by Nick A Weber, CFP®, AIF®, CRPS®


The Consumer Price Index has advanced less than 2% in a year. Mortgage rates are still not far from historic lows. Low inflation is still with us even in this economic recovery, and it may make the Federal Reserve reconsider its near-term timeline for normalizing monetary policy.1


Interest rates on certificates of deposit? They are rising, but hardly as fast as savers would like.


Right now, CD investors are paying an opportunity cost. Look at the recent performance of the S&P 500. Across the six months ending in June, the equity benchmark advanced 8.2%, and it may end 2017 with a sizable double-digit gain.2


Now consider common CD yields, as surveyed by Bankrate. The average annual percentage yield on a 2-year CD was slightly above 1.5% in mid-July; 12-month inflation was running at 1.6% in June. Interest rates on 3-year CDs are currently topping out around 2.00%, and the best rates on 5-year CDs are still under 2.5%. Conservative investors who feel uneasy about placing their money in stocks have little to celebrate given these low rates of return.1,3


Of course, CD investing is about more than the return. A CD investment can deliver liquidity, it can protect principal, it can add diversification to a portfolio, and it can be a welcome refuge for assets if stocks enter a bear market. The Federal Deposit Insurance Corporation can insure as much as $250,000 of the value of a CD (the $250,000 insurance limit is per depositor, not per investment or account type).4


The question is, what is a CD investor looking for today? Is he or she looking for downside protection? Principal protection? Liquidity? A CD investment is structured to offer all that in any stock market climate. Using a CD to invest for growth, however, looks like a highly questionable choice today.


Yes, there are fears that the stock market is at a top and awaiting a correction. True, some investors really hate risk. But are those two factors really enough to make an investor settle for a 1.5-2.5% return? Your answer to that question will depend on your preferred investment style, your risk tolerance, and your financial objectives.


If interest rates do rise steadily in the next 2-5 years, there are some CD investing choices that might result in more yield. Variable rate CDs may make sense, as their annual percentage yield can be adjusted upward in response to rising market rates. A laddered CD strategy could be promising – you divide the money you would invest in one CD among a few CDs with staggered maturity dates, so that you can replace maturing CDs with new ones at higher rates of return.5


You may want to park some invested assets in CDs and other savings instruments as part of a diversification approach. The inflation-adjusted return is currently minimal, but principal protection certainly has its appeal. (Note that surrender charges will apply if you attempt to liquidate a CD.) Any guarantees regarding safety of principal are based on the claims-paying ability of the issuing financial institution; brokered CDs may not be FDIC insured. Traditional CDs are FDIC insured and can offer a fixed rate of return if held to maturity.5

Nick A Weber, CFP®, AIF®, CRPS® may be reached at (916)932-4101 ext 4, or via email at:


This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.



1 - [7/14/17]

2 - [6/30/17]

3 - [7/17/17]

4 - [5/8/17]

5 - [7/17/17]