Banks Are Calling Back Some High-Yielding CDs as Rates Fall
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What is the main topic discussed in this episode?
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Here's your Money Briefing for Friday, October 4th. I'm J.R. Whalen for The Wall Street Journal.
What is happening to high-yield CDs as Fed rates fall?
As the Federal Reserve raised interest rates, high-yielding certificates of deposit, or CDs, became a hit with investors, some offering more than 5%. But as rates trend downward, banks are calling some of those CDs. And for many investors, those attractive rates are going away.
When people purchase CDs, they're locking in a rate for a term. That could be one year, that could be five years. But if rates fall, that means that banks are stuck paying you that higher rate when they could just refinance it and get that money for cheaper.
Wall Street Journal personal finance reporter Amani Moiz will join us to discuss what you should know about callable CDs after the break.
This episode is brought to you by Charles Schwab.
Which types of CDs are callable and how do they work?
Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. Listen at schwab.com slash Washington Wise.
Some people who poured money into the highest-yielding CDs are seeing those attractive rates start to come down. Wall Street Journal personal finance reporter Imani Moise joins me. Imani, which types of CDs are involved here?
The only CDs where you have to worry about interest rates falling are callable CDs. And what will happen as market rates come down is the bank has the option to call your CD, which means that they'll repay you early with all of the interest that you've accrued to date, but you're missing out on that high yield that you thought you'd locked in.
Why do banks offer higher yields on brokered callable CDs?
Most CDs are not callable, but all callable CDs are brokered CDs. And what that means is a CD that you get not directly from your bank, but through your brokerage.
Why would somebody take out a brokered CD?
Because banks offered their best rates through brokerages. By going through brokerages, they did not have to change the rates that they were advertising to their own customers directly, but they could still attract more deposits as needed.
How does the rate on callable CDs differ from regular CDs?
On average, a non-callable CD will be about 40 basis points lower than a callable CD, and that's because the bank is compensating you for taking that risk that they might call it back if rates fall.
Why are banks calling the CDs now?
How much extra yield do callable CDs pay compared with non-callable CD rates?
It'll save them money in the long run. So when people purchase CDs, they're locking in a rate for a term. That could be one year. That could be five years. But if rates fall, that means that banks are stuck paying you that higher rate when they could just refinance it and get that money for cheaper.
Is this happening to all callable CDs at once?
No. It's at every bank's discretion. They may call some CDs and not others. They may be waiting for the market to fall a little bit more. But really, the only way to know is to keep track of your brokerage account.
If somebody purchases a five-year callable CD, can the bank call that before the maturity date?
When and why are banks choosing to call these CDs now?
Yes.
That's not a binding contract.
No. What you're buying, you're buying that rate, but you're also giving the bank the option or the right to take it back.
How do you know that right exists?
It's usually listed up front. For example, I was looking at one of the brokerages, Fidelity's platform, and it has the list of all the CDs. It'll show you the yield. It'll show you the term. And then there's a column that says callable, not callable, or call protected, yes or no. If it says yes, that means it's a non-callable CD and you're locked in. You're truly locked in for that entire term. But if there's no call protection, that means you're running this risk.
If a bank calls the CD before it matures, where does the invested money go?
What should investors check and do if their CD is called?
That depends on the brokerages and the default settings that you have. Most of the advisors that I spoke to suggested that you, one, check your default settings, and two, if possible, see if you could make sure that the proceeds are deposited in something like a money market account, which can still offer some yield.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:01–0:39
2
What is happening to high-yield CDs as Fed rates fall?
0:39–1:25
3
Which types of CDs are callable and how do they work?
1:25–2:13
4
Why do banks offer higher yields on brokered callable CDs?
2:13–2:53
5
How much extra yield do callable CDs pay compared with non-callable CD rates?
2:53–3:30
6
When and why are banks choosing to call these CDs now?
3:30–4:12
7
What should investors check and do if their CD is called?
4:12–5:15
8
How can callable CDs fit into a balanced savings strategy?
5:15–6:52
Speakers
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