Contributed by: Mallory Hunt
The Federal Reserve’s recent decision to continue cutting interest rates has left many investors wondering about their next moves and how to adjust their portfolios. Safe investment options like Certificates of Deposit (CDs) and U.S. Treasuries remain viable options for conservative investors seeking stability and predictable income. As interest rates fluctuate, it’s crucial to assess whether now is a good time to invest in these types of investments or if other options might yield better returns based on you and your investment goals. Here’s why we think these instruments are still worth considering and how you can make the most of them in the current economic climate. Let’s break it down.
Understanding CDs & Treasuries
*A Certificate of Deposit (CD) is a time deposit offered by banks that typically provides a fixed interest rate for a specific term, ranging from a few months to several years. CDs are considered low-risk investments, often insured by the FDIC up to $250,000 per person on the account, making them appealing to conservative investors.
U.S. Treasuries are debt securities issued by the United States Department of the Treasury to finance government spending consisting mainly of Treasury Bills (short-term securities that mature in one year or less), Treasury Notes (medium-term securities that mature in 2 to 10 years) & Treasury Bonds (long-term securities that mature in 20-30 years). They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. Government.
Why CDs Are Still a Good Investment
Despite the rate cuts, CDs continue to offer several benefits for conservative investors:
Safety and Predictability: CDs provide defined income over a fixed term. If you’re risk-averse or looking to preserve capital, CDs can be a stable option, even in a lower-rate environment.
No Market Volatility: Unlike stocks or bonds, CDs are not subject to market fluctuations, making them a reliable choice for those who prefer to avoid risk.
Potential for Laddering: With a lower interest rate environment, you might consider a CD ladder strategy, where you stagger the maturity dates of multiple CDs. This allows you to take advantage of potential future rate changes while still securing some cash in safe, interest-bearing accounts.
As with any investment, what may be suitable for one investor might not be ideal for another. CDs do come with their own set of limitations such as potential liquidity constraints (tying up your funds for a predetermined period) or risks related to reinvestment and interest rates. It is crucial to be thoroughly informed on both the advantages and disadvantages of any investment before making a commitment.
The Appeal of U.S. Treasuries
U.S. Treasuries are another safe haven for investors, especially during periods of economic uncertainty:
Government-Backed Security: Treasuries are backed by the full faith and credit of the U.S. government, making them one of the safest investments available.
Variety of Options: Treasuries come in various maturities, from short-term bills to long-term bonds, allowing you to tailor your investments to your financial goals.
Interest Rate Sensitivity: While treasuries’ yields may decrease following a rate cut, they often perform well during economic downturns as investors seek safe assets.
While the recent rate cuts may have reduced the yields on CDs and Treasuries on the front end of the curve, these instruments still offer valuable benefits for conservative investors. In fact, yields on CDs & Treasuries with longer maturities have actually INCREASED since The Fed began their rate cutting cycle. By employing strategies like laddering and diversification, you can navigate the changing interest rate environment and continue to achieve your financial goals. Keep an eye on economic indicators and remain flexible; the investment landscape can change quickly, and adapting your approach can lead to better outcomes. As always, consult with a financial advisor to tailor your investment strategy to your unique situation. Whether you choose CDs, Treasuries, or explore other avenues, making informed decisions is key to achieving your financial goals.
Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.
*Raymond James Financial Services, Inc., is a broker-dealer, is not a bank, and is not an FDIC member. All references to FDIC insurance coverage in relation to Brokered CDs and/or Market-Linked CDs address FDIC insurance coverage, up to applicable limits, at the insured depository institution that is disclosed in the offering documents. FDIC insurance only covers the failure of FDIC-insured depository institutions, not Raymond James Financial Services, Inc. Certain conditions must be satisfied for pass-through FDIC insurance coverage to apply.