Traders expect the Federal Reserve could start cutting rates as soon as September, sending returns on cash lower, but a few places still offer yields exceeding 5% to those willing to park their money. To that effect, Marcus by Goldman Sachs recently boosted the annual percentage yield on its 1-year certificate of deposit to 5.15%, reflecting a week-over-week boost of 15 basis points, BTIG found. One basis point is equal to one one-hundredth of a percent. Marcus’ yield hike places it in an exclusive group of financial institutions continuing to offer rates in the 5% range on deposits. Citizens Access and Capital One Financial each offer a 1-year CD that yields 5%, while Sallie Mae offers a 5.15% APY. Bread Financial is at the top of the heap, with an APY of 5.25% on a 1-year CD. Though the yields are solid, they likely will not last long. The Fed’s rate-hiking cycle, which started in March 2022, had the pleasant side effect of boosting yields on money market funds, CDs, high-yield savings accounts and other cash proxies. The party will start to wind down as rates slip — and investors hiding out in these short-term instruments will see their yields tumble. “Broadly we still expect online bank deposit rates to decline,” said Vincent Caintic, an analyst for BTIG, in a Friday report. “Almost all the banks in our coverage group expect flat to declining balance sheets.” Indeed, LendingClub recently slashed its 1-year CD APY to 4.2%, reflecting a cut of 95 basis points, Caintic found. “The move by LendingClub is a surprise, as they have usually been at the pointy-end of the deposit rate tables but have now placed themselves at the very bottom,” he said. CDs and money market funds may be a sound place for investors to sock away some short-term cash, especially because CDs permit investors to enjoy today’s higher yields for a set period. However, there are trade-offs for depositors. For instance, investors may forfeit some interest if they “break” their CD ahead of maturity, which makes these funds less liquid compared to money market funds. There is also the possibility that a bank may renew a maturing CD at a lower rate than what was originally offered. Longer term, investors who are heavily concentrated in cash run the risk of missing out on attractive returns in stocks or they may fail to lock in higher yields using longer-dated fixed income assets.
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