Rising rate CDs are not always the best choice for investors who are seeking to stash their cash in a liquid investment, because other options generate better yields.
While rising rate CDs appear to be a good deal since the Federal Reserve has hinted at increasing interest rates this year, investors can expect better returns from either online savings accounts, traditional CDs or a combination of both investments, according to a study conducted by Bankrate, a North Palm Beach, Fla.-based financial content company.
Rising rate CDs give investors the option to avoid being stuck with a low yield when interest rates rise, because they have the choice of withdrawing their funds without having to incur a penalty.
Investors will experience more upside by opening or maintaining both a traditional CD and an online savings account compared to liquid CDs with terms of two years or less, said Greg McBride, chief financial analyst for Bankrate. A one-year CD yields an average of 1.07% while a two-year CD yields 1.26%, according to Bankrate.
Bump-up CDs allow savers to increase their rate at least once during the term and are not a good option if the maturities are less than two years. Out of the 43 offers from 25 financial institutions, only terms of two years or longer had good deals.
None of the 19 step-up CDs produced a blended APY which beat the best yielding traditional CDs of the same maturity. These are CDs with an annual APY which increases more than a scheduled set of "steps" or increases during its term.
Callable CDs which have an embedded call option by the bank to call the CD back whenever they choose are not a good selection either. They tend to favor financial institutions and many investors misunderstand them, he said.
"We found that by and large these rising rate CDs do not make sense," McBride said. "There is no way that interest rates increase far enough and fast enough to compensate what you gave up in the initial return."