Investors who piled into short-term certificates of deposit over the course of the Federal Reserve’s rate-hiking campaign now face a conundrum: What will they do with the money once it matures? The central bank kicked off its higher rate regime back in March 2022, and since then yields in even the most boring investments have grown compelling. Wells Fargo found that the average online CD annual percentage yield among the institutions in its coverage was 0.64% in March 2022. Since then, it’s grown to 4.68% as of last Thursday. Today’s higher rates on CDs aren’t going to last , however. Banks have been preparing for eventual rate cuts from the Fed, even as central bank Chair Jerome Powell calls for more evidence of cooling inflation before rates come down. For investors contending with maturing CDs, that means they’re running out of places to stash their idle cash and still generate an attractive yield. “The issue is reinvestment risk,” said Michael Carbone, certified financial planner and financial advisor at Eppolito Financial Strategies in Chelmsford, Massachusetts. “Short-term yields fall, and you miss out on the longer-term yields you could’ve locked in at an earlier date.” Reassessing your timeline and purpose What investors should do with their maturing CDs largely goes back to their own original plans for the cash in the first place. A financial planning rule of thumb suggests that investors hold up to 12 months of liquid cash as an emergency reserve. “For your emergency savings, it’s great to have money in money market funds, CDs and Treasury bills. Anything beyond that, get it invested,” said Catherine Valega, CFP at Green Bee Advisory in Winchester, Massachusetts. That’s because once the Fed begins cutting rates, fixed income with longer-dated maturities will allow investors to lock in those higher yields. To that effect, Valega has recently recommended that clients diversify out of their maturing CDs into municipal bond portfolios. Municipal bonds give investors the benefit of tax-free income on a federal basis. The interest income may also be free of state income taxes if the investor resides in the same state where the bond was issued. Carbone has been encouraging clients generally to extend maturities, even if it’s five to 10 years. The so-called intermediate term for bonds generally includes effective maturities of four to 10 years, allowing investors to lock in attractive yields with less price sensitivity compared to longer-dated issues. An opportunity to diversify fixed income In addition to adding exposure to longer-dated bonds, advisors have also been diversifying across different classes of fixed income. “For clients prioritizing capital preservation and income generation, revisiting their fixed income investments is a common approach,” said CFP Josh Nelson, founder of Keystone Financial Services in Loveland, Colorado. Some of the exchange-traded funds he’s recommended to diversify investors’ bond allocations include the iShares MBS ETF (MBB) , which gives exposure to mortgage-backed securities, and the BlackRock Flexible Income ETF (BINC) , which uses an actively managed approach to fixed income investing. “Given the uncertainty surrounding interest rate movements, clients may opt for a diversified portfolio of fixed income securities with varying maturities and credit qualities to mitigate interest rate risk while still generating a steady stream of income,” he said.
