Could CDs be Poised for a Comeback?

“But you have to look at rates relative to inflation, and the rates that you’re receiving at the bank right now are truly nothing to write home about,” he said.

Online Banks Offering Higher Rates

One area in particular where CD rates have seen a noticeable uptick is in online banks. Unlike the traditional brick-and-mortar banks, online banks do not have the operational costs associated with branches like Bank of America or Wells Fargo.

Traditional banks build their business models around customer retention and convenience rather than trying to attract new prospects based on higher interest rates. Online banks, however, can bypass the operating costs necessary for traditional banks and offer higher rates on their products like CDs.

In a rising rate environment, the tough sell for CDs will be that the a lack of a floating rate component and slow adjustments won’t allow investors to capitalize on short-term rate increases. Despite this, risk-averse investors can take advantage of CDs if the inherent volatility spikes of stocks or other asset classes are too much to endure.

“Banks tend to move rates up fairly slowly,” he said. “Just because the Fed is increasing rates, you’re not going to see much of an increase in what a bank is offering right now.”

For more trends in fixed income, visit the Rising Rates Channel.