SUPERNEWS

Macro

Online Banks Slash CD Rates in Anticipation of Fed Cuts

By Max Weldon

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1/26, 19:20 EST
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Ally Financial Inc.
Synchrony Financial
UBS Group AG Registered
Wells Fargo & Company
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Key Takeaway

  • Online banks cut 1-year CD rates, with Ally Financial dropping from 5.15% to 4.9% and Synchrony Financial to 5%, anticipating Fed rate cuts in 2024.
  • Bread Financial offers the highest APY at 5.5% for a 1-year CD, while the average APY across online banks is now at 4.89%, still historically high.
  • Investors are advised to consider longer-dated bonds over cash as rate cuts loom, with cash typically underperforming bonds during rate-cutting cycles.

Interest Rate Expectations Prompt CD Yield Cuts

Online banks have been reducing the annual percentage yields (APY) on their 1-year certificates of deposit (CDs), with five banks under Wells Fargo's coverage making cuts this week. Ally Financial's 1-year CD rate dropped from 5.15% to 4.90%, while Synchrony Financial decreased its APY by 30 basis points to 5.00%. Bread Financial currently offers the highest rate at 5.50%. These adjustments come as the Federal Reserve signals potential rate cuts in 2024, with Fed funds futures indicating a 47% chance of a cut as early as the March meeting. Michael Kaye, an analyst at Wells Fargo, suggests that "banks are repositioning their CD rates ahead of potential Fed rate cuts."

The Search for Yield Amid Falling Rates

Despite the recent reductions, 1-year CD rates remain historically high, with the average APY now at 4.89%, up from 0.64% in March 2022. Investors are facing reinvestment risk as yields decline, potentially missing out on capital gains from bond price rallies if they stay in cash. Financial advisors and strategists are encouraging a shift towards longer-dated bonds to secure yields before rates potentially drop further. Mark Haefele, global chief investment officer at UBS Wealth Management, advises that "historically, it has paid to be proactive and switch from cash to bonds well ahead of the first interest rate cut."

Navigating the Shift from Cash to Bonds

The current environment poses a challenge for investors holding cash, as they confront the dual risks of diminishing yields and the opportunity cost of not participating in bond market gains. With the 1-year Treasury bill yielding about 4.78%, and some banks offering over 5% on 1-year CDs, there is still an opportunity to find solid rates. However, the trend suggests a shift in strategy may be warranted. As Haefele notes, "Cash tends to outperform bonds during the first stages of rate-hiking cycles but underperform in the later stages and during rate-cutting cycles," indicating that now may be the time for investors to consider reallocating from cash to bonds to optimize their portfolio performance.

STREET VIEWS

  • Michael Kaye, Analyst at Wells Fargo:

    “We believe banks are repositioning their CD rates ahead of potential Fed rate cuts in 2024.”

  • Mark Haefele, Global CIO, Wealth Management at UBS:

    “Historically, it has paid to be proactive and switch from cash to bonds well ahead of the first interest rate cut. Cash tends to outperform bonds during the first stages of rate-hiking cycles (as we saw in 2022) but underperform in the later stages and during rate-cutting cycles.”