As investors who had flocked to short-term certificates of deposit during the Federal Reserve’s period of rate hikes find themselves in a quandary, the pressing question arises – what should they do with their money once these CDs mature? The landscape has shifted significantly since the Fed started raising rates in March 2022, leading to a notable increase in yields across various investment avenues. For instance, the average online CD annual percentage yield surged from 0.64% in March 2022 to a substantial 4.68% by the recent Thursday. However, the impending reality is that the current high rates on CDs are not sustainable in the long term. Banks have been making preparations for potential rate cuts from the Fed, despite Chair Jerome Powell’s stance of needing more evidence of inflation cooling down before implementing such cuts. This presents a dilemma for investors with maturing CDs, leaving them with limited options to park their funds and still earn an appealing yield.
The crucial step for investors grappling with matured CDs is to revisit their initial objectives for these funds. A fundamental financial planning guideline recommends maintaining up to 12 months of liquid cash as an emergency reserve. Catherine Valega, a CFP at Green Bee Advisory, advises allocating emergency savings to money market funds, CDs, and Treasury bills, while suggesting that any surplus should be invested elsewhere. This approach aligns with the notion that when the rates start to decline, having fixed income investments with longer maturities can enable investors to secure higher yields. Consequently, Valega has been advocating for clients to transition from maturing CDs to municipal bond portfolios, emphasizing the tax benefits associated with municipal bonds. These bonds offer tax-free federal income and may also be exempt from state income taxes for residents of the issuing state.
Financial advisor Michael Carbone has been advocating for clients to extend the maturities of their investments, even if it entails committing to five to 10-year terms. By opting for intermediate-term bonds, with effective maturities ranging from four to 10 years, investors can capitalize on attractive yields with less vulnerability to price fluctuations compared to longer-dated bonds. In tandem with lengthening maturities, advisors like Josh Nelson from Keystone Financial Services suggest diversifying fixed income holdings across various asset classes. Nelson recommends ETFs such as the iShares MBS ETF (MBB) for exposure to mortgage-backed securities and the BlackRock Flexible Income ETF (BINC) for actively managed fixed income investments. Given the uncertainty surrounding interest rate trajectories, constructing a diversified portfolio of fixed income securities with differing maturities and credit profiles can mitigate interest rate risks while ensuring a consistent income stream.
The dynamic environment of shifting interest rates necessitates a strategic reassessment of investment allocations, particularly for investors with maturing CDs. By aligning investment choices with individual financial goals and market outlooks, investors can navigate the challenges posed by transitioning from short-term CDs to longer-term fixed income instruments. Embracing diversification and extending maturities while remaining mindful of potential rate fluctuations can position investors to optimize their yields and preserve capital in an evolving interest rate landscape.