Wednesday, 8 May 2024

3 Reasons to Buy a CD in May

by BD Banks

3 Reasons to Buy a CD in May

Image source: Getty Images

If you have a little bit of spare cash this month, you should buy a certificate of deposit (CD). Here are three great reasons why you may want to consider investing your hard-earned money in a CD sometime during the course of May.

1. Yields are very high

CD rates are extremely competitive right now. The Ascent’s guide to the best CD rates has multiple options above 5.00%, including some CDs offering rates as high as 5.15%. Based on how rates had been trending up until recently, this is an awesome — and unprecedented — rate.

As recently as July of 2022, it was difficult or impossible to imagine these yields. A great rate on a “high-yield” CD was generally around 3.00% or less. And during the COVID-19 pandemic, the most competitive CDs typically still offered extremely low rates that were under 1.00%.

It’s not often you can get such a safe investment offering a rate of 5.00% or higher. There’s no real reason not to take advantage of the opportunity, as long as you have money to commit that you won’t have to withdraw during the duration of the CD term.

2. You can make a short-term commitment and still get a good rate

Buying a CD right now also makes sense because you have a unique opportunity you may not see again for a while.

Traditionally, you get the best rates on a CD by opting for a longer term. This is called the term premium. Basically, it means banks pay you more to take the risk of locking your money up for a while.

Right now, the opposite is true. You can typically get better rates on CDs with terms of 12 months or less compared with CDs that require you to commit to stay invested for multiple years. This opportunity exists right now because banks don’t want to make a long-term commitment to pay today’s high rates for years into an uncertain future.

This means you don’t have to give up access to your money for years to get the best rates. You don’t have to take the chance of getting stuck in a CD for half a decade, even if rates don’t go in your favor. If you can put your money on the line for just a few months, you can score today’s high yields.

3. The Federal Reserve may lower rates sometime this year

Finally, you should open a CD in May before you lose the chance to benefit from the rates available now.

The number of CDs offering rates above 5.00% has already declined by more than 20% over the past four months. And that number could drop even further. That’s because the Federal Reserve has still made clear it wants to lower rates when inflation cools.

While this isn’t happening as quickly as anticipated, Chair Jerome Powell stated at a news conference after the most recent Fed meeting, “My expectation is that over the course of this year, we will see inflation move back down.”

The Federal Reserve’s target rate is around 2.00%, while inflation was at 3.5% in March. The Fed won’t drop rates until it has “greater confidence” things are moving in the right direction. But it’s not impossible to imagine that could still happen some time this year. If the Fed lowers rates, CD rates will likely fall, as banks are influenced by the central bank’s benchmark rate.

There’s little reason to take a chance and wait on CDs when the future is so uncertain. Buy a CD now to take advantage of the opportunity to earn a great return on an investment with very limited risk. If you don’t want to lock in for the long term, you can check out The Ascent’s guide to 12-month CDs paying great rates or even opt for a 3- or 6-month CD. Once it matures, you can reevaluate the situation and decide whether to stay invested or move your money elsewhere.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.