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Recent Changes in the CD Yield Curve

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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
Lauren Perez |

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

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Banking

Money Management Tips to Help You Save Successfully

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Increasing your savings is easier said than done. The National Endowment for Financial Education’s most recent annual consumer survey found that saving money is the biggest cause of financial stress for more than 51% of Americans. If you feel the same way about your savings, don’t despair. There’s a way to manage your money instead of letting it manage you.

Top 14 money management tips

Have enough income to cover your monthly expenses, but can’t seem to gain traction when it comes to building a college savings fund, saving for a down payment on a home or growing your retirement nest egg? Start by taking charge of your finances by using these simple, yet practical, money management tips.

1. Use a budgeting app

Tracking your spending on the go is easy when you use a budgeting and personal finance app, like Mint or YNAB. Simply download your app of choice and, if you want to, link it to your bank account. You can then input your fixed and variable expenses and monitor your spending with the swipe of a finger. Keeping your budget within arm’s reach also helps you to stay on top of your daily spending and stick to a monthly budget.

2. Trim unnecessary expenses

Examine your spending habits to determine where you can cut unnecessary spending. Food is a common expense that can be reduced with a little planning. A grocery shopping list can be your first line of defense against overspending, as it’s easier to make impulse buys at the grocery store when you don’t have a shopping list to guide your purchases.

3. Commit to a written savings goal

Establishing a clear savings goal can keep you motivated and put a stop to impulse buys. Make your goal SMART: specific, measurable, attainable, relevant and timely. For example: “I will transfer $100 a month to my savings account so that by Month 20YY, I will have $800 to put toward a new television.” Post your written goal in visible locations to help reinforce your commitment to achieving it.

4. Live below your means

Spending more than you earn is a recipe for financial heartburn. When you have more bills than money with which to pay them, you could be subject to late fees and other financial penalties which make it harder to save. Cancel services you no longer need or can access at a lower cost. For example, nix the gym membership if you haven’t used it in five months or downgrade your cable package to only include the channels you actually watch.

5. Pay off debt

Eliminating debt may allow you to save more money. By bringing your balances to zero as quickly as possible, you’ll save on future interest charges. To potentially save money now, consider refinancing your debt to a lower interest rate or transferring your debt to a credit card with a lower interest rate.

Once your credit cards and loans are paid in full, you’ll have additional funds to contribute toward your financial goals. Use the same amount you were paying your creditors each month and deposit those funds into your savings account.

6. Build an emergency fund

Financial experts recommend stashing three to six months of living expenses in a liquid high yield deposit account in case of an unexpected job loss or another financial emergency. If this sounds overwhelming, start with a smaller goal of $500 for your emergency fund.

You can grow your emergency fund account by setting up an automatic transfer from your checking account to your emergency savings account each pay period. To grow your emergency fund faster, consider cutting unnecessary expenses, selling unused items around your home, depositing your tax refund or starting a side job.

Without an emergency fund, you risk paying for your next dental emergency or major car repair with your credit card or a personal loan, which can keep you in a debt cycle that’s hard to escape.

7. Increase your income

As long as you save the money instead of spending it, increasing your income with a side hustle, part-time job or more hours at the office is one of the quickest ways to reach your savings goal.

Before adding additional work to your already busy schedule, determine how many hours you have available along with how many months or years you’ll need to commit to the side hustle. When searching for side jobs, be wary of jobs that require an initial outlay of money to get started.

8. Plan for a regular review

Block out time on your calendar to evaluate your progress toward your savings goals. Consider establishing a monthly or bi-weekly financial review. Asking yourself if you’re still on track or if you’re able to contribute more towards your objectives is key to meeting your goals. A quick assessment of your savings plan can also help identify areas where you may still need to reduce expenses.

9. Never pay full price

Online and mobile coupons make it easy to save on groceries, clothing and big-ticket items like televisions and computers. When saving money is convenient, you’re more likely to stick to your savings plan. Do you do most of your shopping online? Install browser extensions that give you cash back when you shop through their online portals. Is mobile shopping more your thing? Download your choice of mobile app that offers cash back, gift cards and notifications of online and in-store deals.

10. Eat out less

Brown bag lunches and meal planning are smart money management strategies that can save you thousands of dollars annually, but sometimes you’ll want to treat yourself. To keep your spending under control, be selective about when and where you eat out. Make a list of local happy hours, upcoming culinary events and prix fixe restaurants to reinvent what it means to eat out on a budget.

11. Bank your financial windfalls

While it may be tempting to go on a shopping spree, upgrade your ride or take a weeklong vacation in the Caribbean when you get a financial windfall, that might leave you with a financial hangover. Once the thrill has subsided, you’re no closer to your savings goal. Instead, be strategic with any unexpected funds that come your way. Commit to adding at least half of these funds to your savings account.

12. Make savings automatic

Contact your financial institution to sign up for electronic funds transfer. This allows you to designate a set dollar amount for transfer from one account to another before you spend it on something else. For example, set $50 to automatically transfer from your checking account to your savings account on the fifth of each month.

If you have multiple savings goals, use a money savings app connected to your bank account to help to make auto transfers goal-specific.

13. Entertain your options

Movie buffs and avid readers rejoice! Free and low-cost services are available that allow you to binge-watch or read the latest big hit without busting your budget.

Movie rewards programs are available across the country. These programs allow you to earn points based on the amount you spend. Points can then be redeemed for additional movie tickets or concession items. Movie clubs allow fans to consume at least one movie per month at a discounted rate in addition to concession discounts.

The public library is an often overlooked resource for endless media entertainment. Look beyond the hardcover and paperback books, and you’ll find CDs, DVDs and magazines. Many libraries now provide a portion of their catalog online, which means you can access e-books, audiobooks, movies and music on your device of choice — for free.

14. Become rate savvy

Online search tools can reduce the time it takes to locate financial institutions offering the best returns on savings deposits. Use the Maximize Your Bank Savings tool from DepositAccounts, another LendingTree company, to help you identify the best place to park your funds to meet a specific goal. The higher the annual percentage yield (APY) the account pays on deposits, the faster your money can grow. Generally, certificates of deposit (CDs) limit withdrawals but offer higher APYs over savings accounts.

Next steps

A consistent savings habit is necessary to reach both short-term and long-term financial goals. If you’re intentional with your money, you’ll see the results. Recognize each achievement for what it is — documented proof that you’re in control of your financial future. Open a dedicated savings account today, and you might only be a few months away from achieving your first savings goal.

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.

Tracy Scott
Tracy Scott |

Tracy Scott is a writer at MagnifyMoney. You can email Tracy here

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Banking

Money Inflation: How Inflation Has Affected Your Money

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Do you remember when you used to be able to buy a regular cup of coffee for less than a dollar? How about gasoline? As recently as 2004, the average gallon of gas cost less than $2. Today, these prices are a distant memory. Inflation is the metric we use to describe the phenomenon of rising prices, which is a basic fact of economic life that you should know about.

Inflation is the gradual increase in the price of goods and services over time. As inflation rates rise, you’ll pay more for the same goods and services, which impacts your daily life, as well as your investments. In the U.S., the current inflation rate is 2.2% as of July 2019.

What is inflation?

Inflation is a general upward trend in the cost of goods and services across the economy, from the price of food to the cost of housing, gas and clothing. As inflation rates rise, the buying power of currencies like the U.S. dollar falls, which means you’ll pay more for a product than you did several years ago.

However, it’s not quite as simple as comparing the cost of milk from one year to the next. Rather, economists determine inflation by looking at the prices of a “basket” of products and services and then measure the average price changes over time.

How inflation affects your money

Inflation impacts the buying power of the dollar, which in turn erodes the value of a consumer’s cash reserves. Each year, your dollars buy fewer goods and services, even if it’s a small change from one year to the next.

While inflation is largely inevitable, there are ways you can protect your money against inflation. Start by looking at your savings account. Up to 99% of savings accounts have interest rates that fall below inflation rates, which means that even as your money grows, it’s not growing quickly enough to keep up with inflation. A MagnifyMoney study found the average savings account rate is just 0.26%, well below the average 2% inflation rate.

You are most susceptible to inflation if you keep large reserves of cash rather than investing your money in vehicles that are more resistant to inflation. Look for investments that have historically appreciated at greater rates than inflation, as well as those that are specifically designed to protect against inflation. Treasury Inflation-Protected Securities (TIPS) are the most direct investments that can help keep your money safe from inflation.

Most bond investments set interest rates that account for inflation, but a TIPS investment has a principal adjustment mechanism increases with inflation and decreases during times of deflation. When your TIPS has reached maturity, you’ll be paid the adjusted principal amount or the original amount, whichever is larger. These investments pay out fixed-rate interest twice a year – the rates also rise and fall with inflation and deflation rates. TIPS are a good way to diversify your portfolio and the most direct way to hedge your money against inflation.

How inflation is calculated

Economists measure inflation with the Consumer Price Index (CPI), which focuses on how inflation affects consumers; the Personal Consumption Expenditures (PCE) index, which is more tightly focused version of CPI; and the Producer Price Index (PPI), which is based on surveys of prices businesses charge for goods and services. These three indices measure the cost of baskets of products and services, and each month reports are published on changes in CPI, PCE and PPI.

In 2016 and 2017, the CPI surveyed approximately 24,000 individuals in the U.S. Those consumers provided the CPI with detailed data regarding their quarterly spending habits, while another 12,000 provided information on their spending over a two-week period.

One easy way to understand inflation is to compare the buying power of $100 over the course of the last several decades. Think of how much rent and other housing costs have increased over the years. Those increases are likely be due to a wide variety of factors, but one of them is inflation and the declining buying power of the dollar. This graph indicates the changing value of $100 in 2019 money:

A closer look at inflation rates historically

As you can see in the graph, inflation has held pretty steady since 1940. However, there are also some aberrations that reflect the state of the U.S. economy at any given time. For example, the economy experienced deflation during the years of the Great Depression through the 1930s, when markets crashed and unemployment rates sat at historic highs. Deflation is the opposite of inflation: When the buying power of a currency increases over time.

You can also see rapid inflation growth in the 1970 to 1980 period. The Great Depression and the 1970s are outside of the norm, and the Federal Reserve Bank tempers inflation rates to keep them around 2%. The Fed aims to keep inflation rates at about this rate to provide greater spending stability for consumers, promote high employment rates and to temper long-term interest rates.

The bottom line

Inflation is inevitable, and it has a direct effect on your money. It’s important to understand how inflation affects your money and to keep an eye on the rate of inflation over time.

Despite the fact that you can’t stop inflation and the impact it has on your cash reserves, you can take steps to protect your finances from inflation. Look into investments that have inflation embedded into their returns, such as as fixed-income securities. You can also explore bond investments that account for inflation in their interest rates and principal payouts, such as TIPS.

Seek out investments that have historically appreciated more quickly than inflation has increased at a rate greater than 2% each year. You may not be able to stop inflation, but by diversifying your portfolio and monitoring the CPI over the years, you can know what to expect and how best to protect your money.

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.

Anne Bouleanu
Anne Bouleanu |

Anne Bouleanu is a writer at MagnifyMoney. You can email Anne here