So there I was, minding my own business, walking down Broadway in my neighborhood, and what do I see in the window of a local bank: An offer for 3% on a five-year CD.
Now this wasn’t in the window of one of the megabanks that dominate this sector in New York. But it wasn’t in the window of a one-branch, no-name either. (If you’re curious, it was Banco Popular, which has 49 branches in the United States.)
Literally, a sign of things to come in the days before the Federal Reserve meets on Wednesday, June 13. The odds point, overwhelmingly, to an interest rate increase by the Federal Reserve. The effective Fed Funds rate was 1.7% on Friday, June 8.
I can remember when banks in my neighborhood were posting CD rates of 1.15% as if it were a license for a saver to coin money. So 3% was startling. (The top CD rate in the New York area on June 11, according to Bankrate.com, was 3% for a three-year CD at Pure Point Financial.)
And tempting, I’m sure, to some people who might otherwise be thinking about putting money into stocks and bonds. After all the yield on the SPDR S&P 500 ETF (SPY) is just 1.8%. The yield on a 2-year Treasury was 2.52% today, June 11. And the yield on the five-year Treasury (a maturity matching that of the CD at Banco Popular) was 2.8% on June 11.
I don’t find a 3% yield for locking up my money for five years terribly appealing at a time when interest rates and inflation are projected to rise. Yes, the CD is guaranteed to pay you back your initial capital and, yes, it is insured by the FDIC, but rising inflation will eat into the value of your initial capital and your interest payments. And the odds are that we’re just at the beginning of a period of rising interest rates so that you’ll be able to earn better than 3% not too far down the road.
But 3% is getting competitive. And it’s a measure of one challenge to stocks snd bonds in the months ahead. (And it’s a sign that the strong U.S. dollar may be strong for a while.)