US CDs/T-bills: glowing up in an era of higher rates

No US personal investment strategy has benefited from a glow-up quite in the way certificates of deposit and short-dated Treasury bonds have in recent months.

For the past decade, CDs — which offer savers a fixed return for a defined period — have not been a big part of private portfolios because they paid such a low rate. But the Federal Reserve’s aggressive rate rises and falling deposits mean US banks are having to fight harder for savers’ cash.

At Citigroup, customers can get a 4.15 per cent annual percentage yield (APY) on a 12-month CD. Marcus, Goldman Sachs’s consumer banking business, offers CDs with a 4.4 per cent APY. This compares to the start of 2022 when average national CD rates were less than 0.5 per cent.

Even JPMorgan — one of the biggest beneficiaries of the surge in new deposits during the pandemic — has launched a three-month certificate of deposit that offers a 4 per cent APY.

America’s biggest bank by assets warned earlier this month that it might be forced to pay more for deposits this year. Its outlook for $73bn in net interest income in 2023 was higher than the $67bn recorded for 2022. But this represented a slowdown from the annualised pace in the fourth quarter. It also fell short of analysts’ expectations.

Private investors have crowded into auctions for newly issued short-dated Treasuries, called T-bills. In each of the Treasury department’s four-week T-bill auctions since November, individuals consistently snapped up more than 2 per cent of the notes. That compares with about 0.7 per cent at the start of 2022.

All of this may seem like little consolation when both inflation and 30-year mortgage rates are running above 6 per cent. But with stocks still subject to earnings shocks and bonds expected to remain under pressure from further Fed rate rises, investors need to be patient. A CD with a 4 per cent return is a sensible place to park your cash while you ponder whether the US equities bear market is really over.

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Business Asia
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