Investors who scored a little more interest from their callable certificates of deposit may soon find themselves left out in the cold. The Federal Reserve last week dialed back interest rates by a quarter point, bringing its target rate range down to between 4.5% and 4.75%. Since the central bank kicked off its rate-cutting campaign in September, yields on cash instruments have been sliding, including the amount that savers earn on money market funds. Consider that the Crane 100 Money Fund Index now has an annualized seven-day yield of 4.57%, compared with 5.1% at the end of August. Banks have also slashed the interest they pay on high-yield certificates of deposit — with Marcus by Goldman Sachs lopping 10 basis points from the annual percentage yield on its one-year CD to 4.1%, according to a Sunday report from BTIG. Banks’ adjustments for the lower-rate world have been particularly painful for investors holding callable CDs, as issuers paying rich levels of interest are redeeming the instruments ahead of maturity, financial advisors say. “The call period could be a difference of six months, but that six months matters so much to the bank that they’ll give up 15 to 20 basis points to entice you to go shorter,” said Malcolm Ethridge, certified financial planner and managing partner at Capital Area Planning Group in Washington, D.C. “The CDs that we had that were callable — they’re being called right now,” he said. Give and take In addition to buying CDs directly from a bank, investors can also shop for brokered CDs through their brokerage. This gives them a wide range of issuers, CD terms and yields to choose from — and investors may find rates that are sweeter than what they’d get buying directly from a bank. There’s also the fine print: call provisions. The issuing bank can call or redeem your brokered CD ahead of its maturity. However, investors are paid a little more for taking on that call risk. Consider that investors can shop on Vanguard for a brokered CD with a maturity of 10 to 12 months and an annualized yield of 4.55% if the instrument is callable. For comparison, noncallable brokered CDs of a similar maturity on the platform have an annualized yield of 4.25%. “I’d say it used to be 1 in every 10 brokered CDs had a call feature as an option, now it’s like 20% of those that are available also have a call option,” Ethridge said. Indeed, a client holding a 12-month brokered CD with an APY of 4.65% had their instrument called with six more months to go, he said. The call provision can be a rude awakening for investors who were banking on the interest income. They’re faced with reinvestment risk, meaning they have fewer places to turn for the same level of yield. “If you had something yielding 5%, you’re not going to be able to replace that with anything now — not Treasurys or CDs,” said Dinon Hughes, CFP and financial consultant with Nvest Financial, which has offices in Portsmouth, New Hampshire, and Kennebunk, Maine. “If you were wise enough to start locking those in six months ago, a year ago, you probably want to double-check and make sure they’re not callable,” he added. The next best thing For investors facing call provisions, the next step with those proceeds will depend on their time horizon and risk appetite. Even as CD rates are considerably off their highs, several issuers are still offering yields upward of 4% on one-year instruments. Bread Financial has an APY of 4.3% on its one-year CD, while Capital One pays 4.2%. Investors can also ladder CDs of varying maturities, which can deter them from “breaking” the CD ahead of maturity should they need the money. Individuals who need their cash readily accessible — perhaps for a down payment on a home — may want to turn to a high-yield savings account. The Federal Deposit Insurance Corp. backs bank CDs and savings accounts up to $250,000 per depositor and per ownership category. Treasury bills also give investors some peace of mind, as they are backed by the full faith and credit of the U.S. government. A bonus: Interest from Treasurys isn’t subject to state or local taxes. It is, however, taxable on a federal level. For savers with a longer time horizon and who don’t mind some price fluctuation, short-duration bond exchange-traded funds are another alternative. For instance, Vanguard’s Ultra-Short Bond ETF (VUSB) has an expense ratio of 0.1% and a 30-day SEC yield of 3.74%. Ethridge said that his client whose CD was called back ultimately stashed the proceeds in a money market fund offering a yield of about 4.6%. “The time with the brokered CDs has probably come to an end,” he said. “We will probably just be doing high-yield money market funds from here on out.”
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