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Recent Changes in the CD Yield Curve

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you pay attention to financial markets, you probably know that the U.S. Treasury yield curve helps investors understand the direction of interest rates as well as broader economic trends. But have you ever taken a look at the certificate of deposit (CD) yield curve?

The recent changes in the federal funds rate have impacted the annual percentage yields (APY) — and the yield curves — of U.S. Treasuries and CDs in different ways. Our analysis examines these differences, and what they mean for your savings strategy.

Thanks to the consistent Fed rate hikes over the last three years, CD yields have been staging a notable recovery from the ultra-low levels seen in the wake of the Great Recession. Longer-term CDs have seen slightly bigger yield increases than CDs with a maturity of one year or less. The average rate on a 5-year CD increased from 1.27% APY in March 2014 to 2.26% in March 2019, while the average rate on 1-year CDs went from 0.42% APY to 1.36% in that same time period.

However, the Fed has made it pretty clear that 2019 will see few, if any, rate hikes. Treasury yields have fluctuated rapidly, and the Treasury yield curve has flattened and even inverted in response to the Fed’s evolving rate strategy, not to mention softer economic data. CD rates have begun to plateau, especially the longer maturities. CD yields are bound to catch up with Treasuries; given this outlook, it may be time to get the CD ladder down from the attic.

Key findings:

  • The CD yield curve has steepened in recent years. Meanwhile, the more carefully watched Treasury yield curve has flattened over recent months. The flatter Treasury curve has been a cause for concern, as it can signal an upcoming recession.
  • CD rates are currently offering more competitive rates than last year, on average,  particularly for longer-term CDs. Before taxes, the average 5-year CD has a 2.24% APY as of February. This falls just 0.30 percentage points behind 5-year Treasury Note (at 2.54%), compared to being 0.97 percentage points behind a year ago.
  • The spread between the 1-year and 5-year average CD rate is nearly 1 percentage point — remaining roughly the same over the past 5 years.

Breaking down the data

The following data visualizations allow us to take a deeper dive into some of our key findings. We’ll take a look at:

  • Changes in the CD yield curve since 2014
  • The difference in percentage points between Treasury notes and their CD counterparts
  • The spread between 1- and 5-year Treasury notes have fluctuated much more than CDs

We had been seeing incremental increases in CD rates across all terms in the period between 2014 and early 2018. By February 2019, the CD curve (shown below in red) had moved significantly higher after the aggressive rate tightening of 2018. As the Fed really stepped up its rate hikes that year, CD investors saw ever higher yields.

Below, you see the difference (in percentage points) between Treasury note yields and CD yields, in maturities between 6 months and 5 years. Back in 2014, you can see that shorter-term CD rates topped Treasury rates, while the 5-year CD was much weaker. That trend has reversed. In January, 5-year CDs fell 0.33 percentage points behind 5-year Treasury notes, while the average 6-month CD is 1.70 percentage points behind.

The spread between 1- and 5-year CD rates haven’t changed much since 2014. This means that with each change in average 1-year CD rates, for example, 5-year CD rates have changed proportionally. The spread between 1- and 5-year Treasury rates, however, have been much more volatile over the same period. In January, we even saw a negative spread — indicating an inverted yield curve — where the 1-year rates were higher than the 5-year rates. Like the chart above, this data shows that treasury yields of different maturities are much more responsive to changing rates, and that CD rates are much slower to respond.

CD yield curve vs. Treasury curve

In the simplest of terms, a yield curve helps us look at the relationship between rates (on the y axis) and maturities (on the x axis) on a graph. The U.S. Treasury yield curve looks at the rates and maturities of U.S. Treasury securities, where maturities range from one month to 30 years. A CD yield curve compares the rates and maturities of banks’ retail CD accounts.

A normal yield curve slopes upward to the right, with longer terms delivering notably higher yields than shorter-term maturities. Yield curves can become abnormal, however, signaling possible trouble ahead. A flat yield curve illustrates little change between short- and long-term rates. An inverted yield curve happens when shorter-term yields are higher than longer-term yields, indicating that investors have little trust in the returns offered by long-term investments.

The chart above compares the current CD yield curve against the current Treasury yield curve. The CD curve looks normal and healthy, while the Treasury curve is flat, which is considered less normal and less healthy. You can also see how narrow the spread is between the average 5-year CD rate and the 5-year Treasury note was in February.

A flattening Treasury curve can signal a recession

A yield curve indicates the direction that investors predict rates are going to go. Looking at the CD yield curve, we can see that consumers are still opening 5-year accounts with high interest rates. This hints that investors predict a future drop in rates, pushing them to lock in high rates now for the long term.

The U.S. Treasury curve is much more volatile, determined by the current supply and demand of U.S. Treasury securities, and day-to-day changes in the market environment. In addition, short-term securities are directly affected by Fed economic policy through the federal funds rate (which also determines deposit rates like those for CDs). Because of these ties, the Treasury curve gives us an idea of where the broader economy might be headed. A flat curve often predicts economic changes ahead. Meanwhile, an inverted yield curve, like the one we’re seeing now, has often been associated with an upcoming recession. An inverted yield curve, where longer-term yields fall behind short-term maturities, suggests diminishing potential of longer-term investments.

How to use a CD ladder to your advantage

While there’s no way of predicting exactly when banks plan to change CD rates, you can use the yield curve to inform your CD investing strategy, especially in an economic transition period like the one we find ourselves in now.

When you build a CD ladder, you are depositing funds in multiple CDs with varying maturity dates. You can lock in the high rates on long-term accounts and still have the chance to snag even higher rates on shorter terms, like 1-year accounts. A CD ladder can also serve as a semi-steady stream of income every year or so, depending on how you build it.

By understanding the CD yield curve, you’ll have a read on whether to base your ladder on longer-maturity CDs or shorter-term ones. Today’s normal CD yield curve indicates some trust in CD rates to keep steady. However, the Fed’s pause on rate hikes could signal some upcoming changes in the CD yield curve.

“As we have seen in the last few months, CD rates can start falling pretty fast, long before the Fed changes direction,” said Ken Tumin, founder of DepositAccounts.com, a LendingTree-owned site. “So I think the basic CD ladder that matures into regular renewals of 5-year CDs is still the best choice.” That way, you can maintain high yields even if the economy takes a turn for the worse and rates begin to fall even further.

To maximize your earnings across the years, you won’t want to open any old CD. Look for the best CD rates to ensure you’re growing your money as efficiently as possible. For example, you can get a #CDRates.goldman APY on a 1-year CD at an online bank compared to a paltry 0.05% APY at a traditional brick-and-mortar bank. The online bank can grow a $5,000 deposit in a year by about $140 while a brick-and-mortar bank yields only $2.50. Since you’re setting aside that cash for months at a time, you’re going to want to make it worthwhile.

Another way to strengthen your CD ladder is to find CD accounts with low early withdrawal penalties. These penalties can take a big chunk out of your savings if you’re not careful, as they typically charge months worth of earned interest. Finding a bank with low penalties can minimize your losses if you ever need to dip into a CD account before maturity. Or, you can even find several no-penalty CDs. These are more limited in term lengths, but you can rest easy knowing you won’t lose money should you need to access your funds early. This is helpful if you need some cash in a pinch — or if you find higher rates halfway through your term.

Methodology:

MagnifyMoney compared the average Certificate of Deposit (CD) rates, as collected by DepositAccounts.com, examining the changes in Annual Percentage Rates over time, and the difference in yield between CDs and U.S. Treasury Notes, as measured by constant maturity rates.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Lauren Perez
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Lauren Perez is a writer at MagnifyMoney. You can email Lauren here

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What Are Liquid Assets?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You’ve heard it countless times: Build your assets and invest for the future. It’s sound advice, but if you needed money right now, how easily could you turn your assets and investments into cash?

All of your assets have value, but liquid assets are the ones you can quickly turn into cash without incurring any significant fees or penalties. Non-liquid assets either take time to sell or may lose value if you need to quickly turn them into cash.

The money you have in your checking and savings accounts, accessible on demand with a debit card? That’s a highly liquid asset. The RV parked in your driveway? It takes time and expense to sell, making it a non-liquid asset.

All of your assets and investments can be liquidated, if necessary. But before you sell anything, financial planners say you need to take stock of your asset portfolio and understand the liquidity of your holdings.

What to know about liquid assets

Simply put, liquidity is your ability to convert assets into cash. A liquid asset is often defined as cash or an investment with a maturity of 12 months or less, according to Marty Reid, president of Reid Financial Consulting and a certified financial planner. Holding liquid assets is important in case you need cash for emergencies, unexpected expenses or to make big purchases on short notice.

When explaining liquidity to clients, some financial advisors illustrate a pyramid of assets, with cash on hand or money in a savings or checking account at the top as the most liquid, and items or properties that take more time, effort and expense to sell, such as a house or a boat, towards the bottom.

Some assets that can fall into a gray area between liquid and non-liquid are stocks, mutual funds and longer term government securities. You can liquidate these investments for cash, but it could take up to a few days to get your money. You could also face penalties or costs, including brokerage fees, changes in market value, forfeiting interest gains or possible tax implications.

With stocks in particular, when you go to sell, you’re at the whim of the markets and it can take up to three or four days to get your funds. “What if the market is down the day you need money? If the market is down or volatile and you need money, you could be forced to sell and lose money,” said Kaya Ladejobi, a CFP and founder of New York-based Earn Into Wealth Strategies.

Examples of liquid assets:

  • Cash: Hard cash you physically have on hand to pay for expenses.
  • Checking or savings account: Money on deposit with a bank or credit union that you can access immediately.
  • Money market account: A money market, or MMA, is a high-interest savings account that can have check-writing privileges. MMAs may have more restrictions than a typical savings account, including higher minimum balances and limited number of withdrawals.
  • Certificate of deposit: Also known as a CD, this can have a duration that ranges from a few months to several years and offers higher interest rates than savings accounts. If you cash in your CD before the term expires, you could face a penalty on your accrued interest.
  • Treasury bills, notes and bonds: Government-issued securities with maturities ranging from a few weeks to 30 years. Shorter term securities are more liquid than long-term holdings. Interest rates are higher on longer securities. If you sell before maturity, you could lose value and possibly pay broker fees.

What to know about non-liquid assets

Non-liquid assets can be very valuable and marketable. These fixed assets should not be considered as a source of funds for your daily lifestyle or basic needs, but rather as tools to build long-term financial success, said Reid. If you try to sell a long-term asset on short notice, you might not receive the full benefit of their value and you could incur excessive fees associated with a hurried sale. Most of all, the sales process can be slow, which is the very reason they are not liquid assets.

That’s not to say there isn’t a market for these non-liquid assets. On the contrary, when you sell real estate or personal effects like jewelry or collectibles, you can realize considerable financial gains. Likewise, the long-term investment accounts, including IRAs and 401ks, can appreciate over time, but you’d lose value if you sold early, including potentially steep tax penalties.

“Any time you have to pay transaction costs, like using a broker, to sell something, it might be more costly. In addition to that, when you have to find a buyer and the pool of buyers is limited to turn an asset into cash, that makes it challenging,” Ladejobi said.

Examples of non-liquid assets

  • Real estate: Homes and land hold considerable value, but would take time and expense to sell, making real estate one of the most non-liquid assets.
  • Cars, RVs and boats: Recreational vehicles can also have strong monetary value, but take time and resources to sell.
  • Jewelry: Individual pieces and collections can fetch large sums, but you’ll need to find a buyer or possibly a broker to handle the transaction.
  • Furniture and collectibles: Like jewelry, these personal effects can appreciate strongly and may have enthusiastic buyers, but you’ll need to handle marketing and transactions, or work with a broker.
  • Retirement accounts (401ks, IRAs and investment accounts): These long-term investments will grow over time, eventually funding your retirement. If you cash out early (usually before you’re 59 1/2 years old), you could face steep penalties and tax implications. If you take money out of an IRA early, it could be included in your taxable income and incur a 10% additional tax penalty (there are some exceptions).

Why is asset liquidity important?

You never know what hardships or adventures life might throw your way. That’s why it’s important to have liquid assets at your disposal. Many investment advisors often urge clients to keep between three to six months of cash on-hand to pay living expenses, including housing, food and utilities.

Amit Chopra, a CFP and managing partner of Ramsey, N.J.-based Forefront Wealth Planning and Asset Management, often adjusts his advice based on a client’s age and expectations. Younger clients, he said, may want to keep six to 12 months of living expenses on hand in cash in case they decide to pursue a less stable job, such as at a startup, or a personal adventure. “Having a little more cash gives them the flexibility to do that,” he said. With older clients, who may be more established in their careers and personal lives, Chopra recommends setting aside enough cash for six to nine months of expenses.

As you prioritize how much liquidity you need in your financial portfolio, there are some additional considerations, including your tolerance for risk with investments and your long-term financial goals. To determine what’s right for you and how much liquidity you might need, the U.S. Securities and Exchange Commission (SEC) recommends investors take stock of their personal financial needs and determine the right mix of liquid and non-liquid assets. While cash and cash-equivalents are the safest investments — and the most liquid — they also yield the smallest returns.

Liquidity is a balancing act. Having cash on-hand is important for emergency car repairs or medical bills, and to fund lifestyle expenses, such as home improvements or a wedding, Reid noted. He encourages clients to mix liquidity with long-term investments.

“In real estate, they say, location, location, location. With investing, it’s diversification, diversification, diversification. How you diversify depends on your financial position, your risk tolerance level, and your long term and short term objectives,” said Reid.

The final word on liquid assets

When it comes to financial flexibility, cash is king. From there, your personal liquidity plan is a very personal choice, based on how much cash you think you need to be secure and comfortable. There’s no single right answer.

However, when it comes to realizing the value of your assets, not all investments are created equal. If you need funds quickly, with minimal headache and minor expense, cash and cash-equivalents are the easiest and fastest way. If you have more time to put into selling an asset or a longer timeline for needing money, non-liquid assets can be transformed into liquid ones, but it takes both planning and an active market to realize their fullest value. One thing is certain: The cash in your wallet and your checking and savings accounts are the ultimate liquid asset.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alli Romano
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Alli Romano is a writer at MagnifyMoney. You can email Alli here

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Review of BBVA ClearSpend Prepaid Visa Card

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The BBVA ClearSpend Prepaid Visa Card provides the convenience of paying for purchases with plastic for people who might not be able to qualify for a traditional checking account. In addition, the BBVA ClearSpend card offers handy budgeting features that can help you keep your finances on track.

This prepaid debit option is an excellent choice for users looking to avoid fees for loading funds onto the card. BBVA charges no fees for most funding options, although it’s worth noting that you cannot deposit regular checks onto this card, only paychecks via direct deposit. Before you rush to apply, read on to learn more about using this alternative financial product.

BBVA ClearSpend Prepaid Visa Card features

The BBVA ClearSpend Prepaid Visa Card is simple to use. You load money onto the card via one of the following five methods:

  • From a BBVA debit card, no fee
  • At a BBVA bank branch, no fee
  • At a Visa ReadyLink location, $4.50 fee (can vary by location)
  • Via direct deposit, no fee
  • Via a transfer service, such as Paypal, Popmoney, or Venmo, no fee

Once the money is loaded onto the card, you can spend it anywhere Visa is accepted. You can use the card to make purchases, pay bills or get cash out of an ATM. However, you can only spend up to a limit of $3,500 in transactions per day or $600 cash withdrawals from an ATM per day. If you try to make a charge that would overdraw your account, BBVA simply rejects the transaction.

This card also comes with handy app-based automatic budgeting tools. Use the card normally for 30 days. After this period, the BBVA ClearSpend app automatically generates a budget for you, complete with spending limits and an automatic spending tracker. If you have a secondary cardholder on your account, the budgeting tool will track spending for each user, letting you monitor each other’s spending patterns.

BBVA ClearSpend Prepaid Visa Card fees

BBVA has few fees, most of which are relatively easy to avoid. If you plan your card usage strategy in advance, it’s entirely possible to use the BBVA ClearSpend card and not pay any fees at all.

One of the downsides of using the BBVA card is that there are certain loading limits in place. You can load up to a maximum balance of $6,500 onto the card. Each time you load it up with money, you’ll have to load at least $25 onto the card, up to a maximum amount of $2,500 per day. If you’re using the Visa ReadyLink service to load funds onto the card, you’re even more restricted: you can only load $600 per day onto the card via this route.

BBVA ClearSpend Prepaid Visa Card Fees

Activation Fee

$0

Reload Fee

$0 if you load cash from a BBVA bank branch, from a BBVA debit card, or from a transfer service such as Paypal or Venmo. A fee of $4.50 if you load cash from a Visa ReadyLink location, although this fee may vary by location.

Direct Deposit Fee

$0

Check Deposit Fee

There is no way to deposit checks written out to you.

ATM Fees

$0 when using a BBVA ATM. $2 for each out-of-network domestic ATM withdrawal and $3 for each out-of-network foreign ATM withdrawal, although your first withdrawal of the month is free. Out-of-network ATMs may also charge their own fees in addition to BBVA fees.

Card Replacement Fee

$0. However, you are only allowed three replacement cards.

Monthly Service Charge

$4, unless you load at least $400 per month onto the card.

Foreign Transaction Fee

3% of the purchase amount

ATM Balance Inquiry Fee

$0 at any domestic ATM. $1 at any foreign ATM. You might also be charged a separate fee by the ATM’s owner for using an out-of-network ATM.

Express Delivery Fee

$20 per card

Paper Check Fee

$15 if you want a paper check for the remaining balance mailed to you when you close your account.

Using the BBVA ClearSpend Prepaid Visa Card mobile app

Most of the day-to-day management for your account can be completed through the BBVA ClearSpend app. You can even download it first and apply for the card through the app. Downloading the app also allows you to do certain things:

  • Lock your card if you lose it or want to stop spending on it
  • Load money onto your card with a transfer service such as Paypal, PopMoney, or Venmo, or with a BBVA debit card
  • Get spending alerts from secondary account holders
  • Use the automatic budgeting and spending tracker feature

The mobile app lets you to manage your card from your account, but it gets rather mixed reviews on the iTunes store — 2.5 out of 5.0 stars — and the Google Play app store — 3.0 out of 5.0 stars.

Opening a BBVA ClearSpend Prepaid Visa Card account

Getting a BBVA ClearSpend card is as simple as it is to use. There are three ways you can get one of these cards:

  • Through the app
  • Online through the BBVA website
  • In person at a local BBVA branch

BBVA does not run a credit check or use ChexSystems when deciding whether to approve you for a card. Even if you’ve had trouble being approved for a checking account in the past, you will still qualify for a BBVA ClearSpend card as long as you pass fraud security measures. This involves identity theft and fraud alert checks through the Visa Prepaid Clearinghouse Service.
Your card will be mailed to you 7-10 days after you apply online, or you’ll be issued it immediately at a BBVA bank branch if you apply in person.

Overall review of BBVA ClearSpend Prepaid Visa Card

Two things make this option particularly useful for prepaid debit card users. First, this card provides handy budgeting and spending tracking tools that can help you manage your money. Second, it’s relatively easy to avoid fees by doing the following things:

  • Load at least $400 per month onto the card
  • Only use BBVA ATMs to make cash withdrawals, or limit yourself to one cash withdrawal per month at a non-BBVA ATM.
  • Avoid using Visa ReadyLink locations to load cash onto your card

Follow these rules, and the BBVA ClearSpend card is a great prepaid debit card and an excellent alternative to a checking account.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Lindsay VanSomeren
Lindsay VanSomeren |

Lindsay VanSomeren is a writer at MagnifyMoney. You can email Lindsay here

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