Are long-term CDs a good investment in 2024? Experts weigh in
For most of this century, certificates of deposit (CDs) have had relatively low yields, with some years of near-zero rates. That made CDs hard to compete with other investments. The past couple of years, however, have been an entirely different set of circumstances. High inflation rates prompted the Federal Reserve to raise interest rates starting in 2022, and now it's not uncommon to see CDs paying around 5% in annual interest.
While that might not be as high of a return as some stocks or bonds, these CD yields are still attractive to many investors, considering the relative safety of these assets. For those who generally want a stable return without risking losses, CDs can be an attractive investment, particularly in this high-interest rate environment.
But while CDs can be a safe place to park cash and earn a fixed return, does it still make sense to invest in long-term CDs, i.e., ones with maturities longer than a year? If getting the highest CD rate is your goal, then a long-term CD might not be the best option compared with short-term CDs. But that might not be the case for long.
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Are long-term CDs a good investment in 2024?
Currently, 1-year CDs pay the highest average rates of any CD term, according to the Federal Deposit Insurance Corporation (FDIC). They average 1.86%, compared with 1.40% for 5-year CDs. But if you shop around, you can often find financial institutions that pay well above this average, such as around 4% to 5% or more, depending on the term.
"While CD rates across the board are historically very attractive, the yield curve remains inverted," says David Johnston, CFP, managing partner at Amwell Ridge Wealth Management. That inversion means short-term CDs pay higher rates than long-term CDs, whereas normally CDs work the other way around. "That said, with interest rates likely to fall over the next 12-18 months, it's unlikely someone locking in a longer-term rate will be disappointed," he adds.
It's hard to say exactly if or when rates will fall and what that will look like, but many predict that locking in long-term CD rates now will result in higher returns than if you opened a long-term CD at the end of the year.
"Interest rates across the board are likely to head lower in 2024. Although Fed officials recently indicated three cuts this year, many economists feel two, quarter-point decreases is more likely. As a result, both borrowing costs, along with CD rates, will decline across all time frames," says Johnston.
Aaron Cirksena, founder and CEO of MDRN Capital, similarly agrees that CD rates will probably decline this year.
"Rates will likely come down overall in 2024, with most analysts predicting the Fed to begin cutting rates to some degree as early as the springtime. Overall that will make the interest rate on most CDs begin to go lower, thus making them less attractive than they are now," he says.
If that happens, even though long-term CDs pay less than short-term CDs currently, by the time you can renew your short-term CD, you might find that rates are lower than what you would have gotten had you opened a long-term CD now.
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Investing amidst falling interest rates
If you wait until rates drop to buy a long-term CD, then the returns might not be as attractive. At that point, you have to weigh whether the lower returns are worth it compared with other investments, such as stocks. While these aren't apples-to-apples comparisons, as stocks are generally much riskier, you have to decide if lower CD rates are still worth the security they provide.
"If interest rates begin to fall back to significantly lower levels, this is when you would typically see more money flow into stocks, simply because the risk/reward premium becomes more attractive. The difficult part of this then becomes most people that are looking at CDs are going to be of a lower risk tolerance level," says Cirksena.
So, it's important to consider what your goals are with any money you're considering putting into CDs. While some investors have recently been using long-term CDs as part of their fixed income portfolios, for instance, CDs are often viewed as savings account alternatives, rather than stock or bond alternatives.
"Comparing FDIC-insured, guaranteed interest CDs against anything where principal is at risk isn't a fair comparison. Regardless of where interests head, CDs remain a landing spot for money needing to remain safe, typically for a shorter period of time – whereas a prudent investor appreciates stocks and bonds require a longer time horizon," says Johnston.
The bottom line
Overall, long-term CDs could be a good investment for those who want to lock in guaranteed returns at a relatively high rate in early 2024. But as the year progresses, if interest rates fall as expected, then long-term CDs could lose some of their appeal. However, the yield curve might then normalize to where long-term CDs pay a higher rate than short-term CDs. Ultimately, investors need to carefully consider their goals to determine what makes sense for them. CDs can be a useful tool for parking cash and earning a fixed return, such as if you know you have an upcoming expense that you want to set money aside for.
