As Rates Rise, CDs Are Making A Big Comeback

As Rates Rise, CDs Are Making A Big Comeback

June 20, 2023

Low-risk, predictable returns for investors needing to preserve their capital

In a rising interest rate environment, fixed-income investments become increasingly important for investors. Fixed-income investments such as bonds, Treasury bills, and Certificates of Deposit (CDs) provide a steady income stream and are generally considered to be less risky than other types of investments such as equities.

Fixed-Income and Rising Rates

Allocating to fixed-income is important for diversification purposes. Fixed-income investments typically have a low correlation with equities, which means that they can provide stability to a portfolio during times of market volatility. This can help investors to manage their overall portfolio risk and work towards a more stable rate of return.

Moreover, fixed-income investments can provide a regular income stream for investors, which can be particularly important for retirees or those who are looking for a steady income stream. This income stream can help to cover living expenses, pay for healthcare costs, or fund other important expenses.

However, when interest rates rise, the value of existing fixed-income investments typically declines. This is because the fixed income payments from these investments become less attractive compared to newly issued investments that offer higher interest rates.

However, investors can take advantage of rising interest rates by investing in new fixed-income securities that offer higher interest rates than existing investments. And given where interest rates are currently, investors would be wise to look to CDs.

CDs Are Making a Big Comeback

Certificates of deposit are making a big comeback in the current rising interest rate environment because they offer a guaranteed rate of return that is often higher than what is offered by other low-risk investment options, such as savings accounts or money market accounts. And as interest rates rise, the rates offered by CDs also tend to increase, making them more attractive to investors seeking a higher return on their savings.

One of the primary advantages of CDs is their predictability. Unlike other investments, the rate of return on a CD is fixed for a set period of time, which can range from a few months to several years. This means that investors know exactly how much they will earn on their investment, making it easier to plan and budget for their financial goals.

Another benefit of CDs is their low risk. CDs are generally considered a safe investment because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per institution. This means that even if the bank that issues the CD were to fail, the investor's principal and interest would be protected up to the FDIC limit.

Your Financial Professional

Investors should consider CDs as part of their overall investment strategy if they are looking for a low-risk, predictable return on their savings. CDs can be especially useful for investors who need to preserve their capital or who are nearing retirement and want to reduce their exposure to market volatility.

However, it is important to note that CDs typically offer lower returns than other higher-risk investments, such as stocks or bonds. Additionally, if an investor needs access to their funds before the CD matures, they may incur penalties for early withdrawal.

Therefore, investors should carefully consider their financial goals and risk tolerance before investing in CDs.

Discuss with your financial professional for guidance.


Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

This article was prepared by FMeX.

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