Where to Invest Your Cash When Interest Rates Come Down
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What is the main topic discussed in this episode?
Here's your Money Briefing for Thursday, March 21st. I'm J.R. Whelan for The Wall Street Journal.
What does the Fed's plan to cut rates three times mean for cash returns?
Yesterday, the Federal Reserve reaffirmed its plan to lower interest rates later this year. That could mean an end to the healthy returns that savers have been earning on their cash for the past two years.
Financial analysts say that rates on high-yield savings accounts are likely to fall first because those adjust monthly, whereas Treasury bills and certificates of deposit are going to fall later because those are in different durations.
We'll talk to Wall Street Journal personal finance reporter Oyen Ededoyen after the break.
The expected lowering of interest rates later this year means there could be more attractive investments than just putting away cash. Wall Street Journal personal finance reporter Oyin Adedoyin joins me.
Which cash vehicles currently yield over 5% and how do they differ?
Oyin, what is the current return on investing cash?
It really depends on which device you're investing in. But certificates of deposit, money market funds, and treasury bills, and high-yield savings accounts are all yielding over 5% right now.
When the Fed does announce a rate cut, which rates on people's money are likely to fall first?
Financial analysts say that rates on high-yield savings accounts are likely to fall first because those adjust monthly, whereas Treasury bills and certificates of deposit are going to fall later because those are in different durations. So you can get a one-year Treasury bill or a six-month Treasury bill, and that won't fall until that bill matures.
Which rates are likely to fall first when the Fed cuts — savings accounts or Treasury yields?
We talked a lot about how CDs became an attractive investment as rates rose over the past two years. With the Fed signaling a rate cut could be coming this year, how have people adjusted those investments?
I spoke with a woman in Connecticut who bought a three-month CD last year at 3.75%. Then she got a 10-month CD at 5.2%. And after that, she started to build a ladder out of half a dozen six-month Treasury bills. That was easy to do last year because yields just continued to go up. But this year, it seems like people are either deciding to separate themselves from these types of investing instruments or get into longer-term cash deposit instruments.
How are savers using CD ladders and what does a ladder strategy mean?
People have been buying CDs with the most attractive yields. According to Kyrnos, a data and consulting firm, about 60 percent of all CDs that consumers purchased in February were yielding above 5 percent. And nearly all of those stood above 4.5 percent. So people are still even this year looking for the most attractive yield they can find.
We hear the term ladder a lot when it comes to Treasury bills. What does that mean?
It basically just means buying different durations of treasury bills or CDs at different times so that when one duration matures, you can put it into another CD or treasury bill without interrupting the yield on another duration.
What changes have banks put into place regarding investments and rates?
Well, in anticipation for rate cuts, banks are already starting to offer highest yields for shorter terms.
How are banks changing CD terms and what should buyers watch for (callable vs non-callable)?
So about 70% of high-rate CDs that opened in February lasted less than a year. Financial analysts say that most consumers look at the rate first and the term second. People are grabbing those shorter-term yields, but the term's probably going to be more important going into the future, especially if the central bank does decide to cut rates later this year. If interest rates do fall this year, someone who buys a one-year CD today at, say, 5% or above might end up gaining more in interest than someone who locks in a higher rate for only six months. Now, that's, of course, if the CD isn't callable, which means that the bank can stop issuing it at any time, and that means that the person who bought the CD might miss out on that extra interest.
How would you find out if it's callable or not?
Usually, CDs will come with a descriptor that includes what type of CD it is, or you can inquire further with the bank that you're buying it from.
So if it's not callable, then the rate is good for the duration of the CD?
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:02–0:11
2
What does the Fed's plan to cut rates three times mean for cash returns?
0:11–1:11
3
Which cash vehicles currently yield over 5% and how do they differ?
1:11–1:51
4
Which rates are likely to fall first when the Fed cuts — savings accounts or Treasury yields?
1:51–2:33
5
How are savers using CD ladders and what does a ladder strategy mean?
2:33–3:26
6
How are banks changing CD terms and what should buyers watch for (callable vs non-callable)?
3:26–4:25
7
Where are people moving matured cash — stocks, longer CDs, or saving for home purchases?
4:25–5:43
Speakers
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