Since their double-digit highs in the 1980s, the trajectory of interest rates has been down, reaching historic lows over the last few years. With the record surge in inflation, also not seen since the 1980s, interest rates are spiking, which is unfamiliar territory for many Americans.[i]
Higher rates mean higher borrowing costs, intended to slow consumer spending to relieve inflationary pressure. However, the economic picture is not entirely bleak because higher interest rates have a silver lining: Higher rates on savings and fixed yield vehicles!
Hallelujah, Interest on Savings is Rising
For the first time in recent memory, the rates on bank savings, certificates of deposit, fixed annuities, and other fixed yield savings vehicles are rising—significantly. For several years, savers had to hold their noses as they deposited money into savings accounts earning a fraction of one percent. What else could they do?
In response to rising inflation, the Federal Reserve is raising its short-term interest rate[i], and financial institutions are responding in kind with increases on most short-term savings vehicles. And, because the Fed is not done hiking rates, you can expect higher rates on your safe money deposits.
Bank Savings and CDs
Looking around at bank savings accounts[i], yields are creeping above the half percent mark, with some accounts offering as high as 0.90%. One-year bank CD rates have made an even bigger leap from an average of 0.15% a year ago to 0.33% as of June 22, 2022[ii]. The five-year average is 0.56%. But, looking around, you can find one-year CDs as high as 2.00% at some online banks and five-year CDs yielding as high as 3.00%.[iii]
Fixed Annuities
Fixed annuity rates have also been in the doldrums for a while, but rates are jumping. Rates on a two-year, fixed-rate annuity are breaking through 3.00% per year. If you go out five years, rates are as high as 4% per year. At seven years, you can find rates as high as 4.15%.[i]
Check Out Government-Backed iBonds
Perhaps the most attractive opportunity for your short-term, safe money is the government-backed iBond, which now yields an astonishing 9.62%. iBonds were designed as an inflation-sensitive savings vehicle with rates changing annually in response to the current inflation rate. iBonds must be held for at least one year.[i]
Safe Strategies to Boost Yields
With the availability of a range of maturities, depositors can balance their need for liquidity and better yields. A popular strategy used by depositors to remain flexible in anticipation of rising interest rates is to “ladder” their CDs through a combination of maturities. The strategy’s net effect is capturing higher interest rates as the CDs mature while always staying invested. It also provides a degree of liquidity because you will have CDs maturing each year.[i]
For example: If you invest equal amounts in a 1-year, a 2-year, and a 3-year CD, when the 1-year CD matures, you roll into a new 3-year CD. When the 2-year CD matures, you roll it into another 3-year CD. From that point forward, you will have a higher-yielding 3-year CD maturing yearly. Longer-term laddering strategies using 5-year CDs can boost your average yield even higher.
Other strategies for capturing higher, safe yields include investing in a floating-rate bond or exchange-traded fund. Your financial advisor is best positioned to assess your needs and circumstances to recommend a strategy that can help you take advantage of rising interest rates. It’s time to put your safe money back to work for you.
[1] https://themortgagereports.com/61853/30-year-mortgage-rates-chart 7 July 2022
[1] https://www.npr.org/2022/06/15/1105026915/federal-reserve-interest-rates-inflation 7 July 2022
[1] https://www.nerdwallet.com/best/banking/savings-accounts 7 July 2022
[1] https://www.investopedia.com/cd-rate-trends-week-of-june-27-2022-rates-leap-5498928 7 July 2022
[1] https://www.businessinsider.com/personal-finance/highest-cd-rates-today-july-4-2022-7 7 July 2022
[1] https://www.marketwatch.com/story/the-fed-rate-hike-makes-annuities-seem-attractive-but-know-how-to-pursue-them-11655490702 7 July 2022
[1] https://www.gobankingrates.com/investing/bonds/i-bonds-rates/ 7 July 2022 [1] https://www.bankrate.com/banking/savings/low-risk-ways-to-earn-higher-interest/ 7 July 2022