By Brett Arends
Looking for a safe place to save your money and earn a good interest rate — for one, three or even five years?
You can still get 5%, or close to it, despite the recent drop.
As long as you shop, of course.
Most retirees are savers, and the recent collapse in interest rates is not the best news.
(Rates rose slightly on Thursday.)
Blame it on the banking panic that came out of nowhere, which caused interest rates to fall all along the yield curve, from three months to 30 years.
One-Year Treasury Rates BX:TMUBMUSD01Y, 4.83% last week, are down to 4.5%.
BX Five-Year Treasuries: TMUBMUSD05Y, which used to pay 4.3%, now pays 3.7%.
And 10-year rates collapsed from 4.8% to 3.57%. BX: TMUBMUSD10Y
These are surprisingly fast moves for the bond market.
Interest rates fall because investors buy bonds for safety, which drives up the price and lowers the interest rate. (Bonds work like a seesaw: when the price goes up, the interest rate goes down, and vice versa.)
And they’re also falling because the market thinks the bank run will ease the pressure on the Fed. Wall Street is now betting that the Federal Reserve is almost done raising interest rates and will start cutting them as early as July. Within days, money markets lowered their year-end forecast for short-term rates from 5.25% to 4%.
Naturally, this could reverse just as quickly. One only has to look at how quickly the money markets change their forecasts to realize that they know no more than the rest of us. Jay Powell said six weeks ago that he would rather keep rates too high for too long than cut them a moment too soon and risk reigniting inflation.
(Uncertainty is why I personally prefer inflation-protected treasury bonds over regular bonds. I see no reason to be extra stressed. Short-term TIPS seem like great business right now for anyone who effectively wants no real risk, paying a guaranteed interest rate of inflation plus 1.5% or more per year for the next five years.The low-cost exchange-traded fund iShares 0-5 Year TIPS Bond ETF (STIP ) is the easiest way to own them.)
But despite the wild swings in the bond market, there are still good deals out there.
Many banks pay interest rates of around 5% on certificates of deposit, in some cases for up to 5 years: and as long as you stay within the $250,000 limit, your money comes with the same security federal than treasury bonds which pay far less.
Banks are still offering generous interest rates because they really, really want extra deposits right now – for obvious reasons.
The trick with CDs is to buy them through a brokerage account, because that’s where you get the best deals. On Thursday, there were several one-year CDs paying 5.25%. American Express and Morgan Stanley offered three-year CDs paying 5%. And American Express offered a five-year CD paying 4.8%.
All of these come with “call protection” which means that you will actually get that amount of interest during the period. CDs without call protection can be prepaid by the bank: you think you are locked in for five years at 5%, then after six months the bank closes the CD and you suddenly get your money back.
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