As interest rates begin to fall, many investors holding callable certificates of deposit (CDs) may see their high-yield investments called back sooner than expected.
Callable CDs, which allow banks and financial institutions to redeem the CD before its maturity date, are often called when interest rates decline. With the Federal Reserve recently beginning a rate-cutting cycle, experts anticipate an increase in early CD redemptions in the coming months.
Callable CDs tend to offer higher yields than traditional CDs to compensate for the risk of early redemption. However, in a falling rate environment, banks are likely to call these CDs to avoid paying the high interest rates locked in during periods of higher rates.
“If your CD is paying 5% and rates fall to 3%, the bank will want to call it back to avoid paying the higher rate,” explained Sean Mason, an investment advisor at Fresno Financial Advisors.
If a bank or brokerage calls your CD, you’ll receive your initial deposit back along with any interest earned up until that point. However, you lose the potential for future interest earnings had the CD reached its full maturity.
Mary Grace Roske from CD comparison site CDValet.com advises savers not to panic but to act quickly to find new investment options that align with their financial goals.
If your callable CD is redeemed early, consider these steps:
- Explore Other Savings Options: Experts recommend moving your funds into a high-yield money market account temporarily. These accounts may offer interest rates between 3.5% and 4.5%, though those rates are expected to drop as well.
- Consider Annuities or Treasuries: For those seeking similar low-risk investments, annuities or US Treasuries may be good alternatives. Annuities, offered by life insurance companies, can provide returns comparable to those of CDs, but with different terms and penalties for early withdrawal. Treasuries, on the other hand, are nearly risk-free and continue to offer rates between 4% and 5%.
- Read the Fine Print: If you have a callable CD, it’s important to check the terms closely, including the non-callable period and call schedule. These factors determine when and how often your CD can be called.
