CD Rates Expected To Rise – Strategies to Make the Smart Buy

Anyone who invests money in CDs wants assurance that they wouldn’t suffer any losses on their principals, and get a small return on their investment choice. But in the past few years, the returns enjoyed by investors have been quite small, as the rates have been rather low in the market.

Yet there have been recent developments in the market, which have set certain expectations about CD rates for the future. It is being expected that the Federal Bank will soon reach a decision about whether to raise the benchmark on its federal funds rate. The question is; will the Feds’ decision compel investors to adopt a completely new approach when looking at Certificate of Deposit?

Roger Young, who is the senior vice president as well as the manager of the fixed income segment at the Fidelity Capital Markets located in Boston, believes that investors should once again consider buying certificates of deposit.

He said that in 2014, the 2 year period Treasury note was ensuring a yield of around 40 basis points in a year, while in the current year, the yield has been increased to 70 basis points. This marks that the market is expecting improvement and there are chances of good returns in the future.

Young explained that the 2 year treasury notes do not define a trail when it comes to CDs, but the rate can be used as a general estimate when one talks about different types of fixed income instruments. So, if there is a chance of a high CD rate environment, what should your plan of action be?

Young believes that investors should not try to time the changes in the interest rates as it can be a hard task. The changes are very hard to predict and accuracy in probability cannot be confirmed. Over the years, the Fed has increased the rate from time to time only to reset and lower it again. Furthermore, the rate prediction of the Feds, already estimates that the choice to tighten the current credit, can prove to be a slow process indeed. Young suggests that it is vital to adopt a strategic approach to the problem. He says that it is important that investors avoid over-committing to a specific maturity period, and ladder investment over a variety of different maturities.

The concept behind laddering CDs is to buy Certificates of Deposit with different maturity time periods. While an old strategy, it is certainly a smart one for the current times, according to Boucher, who is the owner of Boucher Financial Planning Services. He suggests that investments should only be made for 3 years, and once the rates increase to a normal level, it would be best to extend it out to a maturity period of 4 or 5 years.

Breaking investments into multiple CDs is also a good option, which ensures flexibility to make payment of a penalty and maybe also reallocate some of the investment.