The days of earning 5% or more on nearly risk-free certificates of deposit (CDs) are coming to an end, but for some, they could be ending even sooner than expected as banks and other financial institutions call back CDs early.
Callable CDs give banks and brokerage firms the right to redeem a CD before the maturity date. They’re more likely to call CDs when interest rates are falling. Financial institutions don’t want to pay higher interest rates should prevailing interest rates drop.
Seeing that the Federal Reserve began a rate-cutting cycle in September, experts expect more CDs to get called in coming months. The Fed lowered its short-term benchmark fed funds rate for the first time in more than four years, by a half a percentage point, from a 23-year high. It’s also expected to continue cutting rates through next year.
“It’s simple math,” said Sean Mason, investment adviser representative at Fresno Financial Advisors. “If the CD pays 5% and rates drop, and CD rates go to 3%, the bank doesn’t want to pay 5% anymore. They’re also receiving lower rates (on money they lend) than before. So, in a decreasing interest rate environment, the odds go up your CD will get called.”
Are all CDs callable?
Not all CDs are callable so savers should check the terms of their CDs, especially high-yielding ones, experts said. Issuers typically pay higher yields on callable CDs than on traditional ones because of the risk of early redemption.
