For the past few years, interest rates have usually slid into a pattern that is volatility-prone and has been knocking many savers and investors off course in search of solid, dependable places to grow their money. Due to the volatility associated with these patterns, High Yielding CDs, which were once strictly a niche product, are now of more interest as an alternative investment to be used to increase wealth with very little risk. Still, the question remains: in this low-interest-rate environment, do High Yielding CDs still present themselves as a good investment?
The Current Interest Rate Environment
With regard to the most recent releases of the economic package, interest rates are at an all-time low historical. Since post the global financial crisis, it has remained at very low levels throughout the past years. The low interest rates were encouraged by central banks in order to bring about an appropriate boost in growth of the economy and consumer spending. At the very least, traditional savings accounts and standard CDs barely provide yield; that itself compels the investor to consider other options.
Low interest makes one barely reap any yield, most especially if such person relies on what savings can generate, for instance, a retired person. This necessitated investment products that offer higher yields. In this light, High Yielding CDs have met the gap.
Why High Yielding CDs Work Well in Low Interest Rate Conditions
While the setting is low interest, High Yielding CDs are certainly very appealing to the conservative investor for its ability to provide rates higher than usual. Even though the rates would be lower than before the crisis, the margin between the High Yielding CDs and standard savings accounts would be pretty wide. For a risk-averse investor, who would have more than average stability with assured returns, this is a high yield which can be pretty attractive when viewed against other riskier assets, say equities or bonds.
As an additional advantage, inflation rates are known to be constant over the long term. In this way, High Yielding CDs provide a mechanism to maintain purchasing power. Given that inflation generally devours savings over the long-term, a High Yielding CD provides at least an inflationary-beating rate, hence not eroding real wealth.
High Yielding CDs: Other Than Other Fixed-Income Investments
Other alternatives in the fixed-income category include Treasury or municipal bonds when it comes to a low-interest-rate environment. For example, the latter provides stability in returns but certainly not a return that would be associated with High Yielding CDs.
For example, Treasury bonds are quite literally backed by the U.S. government and one of the safest investments available. But their yields are generally lower than that of High Yielding CDs, and it’s especially terrible if interest rates have a tendency to fall. A municipal bond issued by a state or local government, tax advantages are experienced; however, there is always the threat of issuer default. Although High Yielding CDs are charged penalty rates at the time of withdrawal, still they provide some return and are insured through the FDIC, so it becomes quite a safer investment.
High Yielding CDs in Diversified Portfolio
High-yield CDs play an extremely important role for conservative investors. They deliver a predictable return that is not adverse to the volatilities of the stock market. In fact, for those near retirement or for any individual who has some need for steady and consistent income, high-yield CDs are a very safe and sound means of earning interest without wasting any capital.
The High Yielding CDs thus invest, and enable the investor to attain a balance between risk and reward as part of a portfolio. This would mean that the stability of a portfolio will still be preserved at whatever period in the markets. When aggregated with the overall investment strategy, the High Yielding CDs can be integrated with equities, bonds or real estate for growth.
Restrictions on High Yielding CDs End
While High Yielding CDs have several advantages, they aren’t without weaknesses. A major weakness to High Yielding CDs is the fact that they are illiquid. The reason for this is that because the High Yielding CD is a time deposit, the investor is tied up with funds in that account for some extended period, possibly several months or even years. Most early withdrawal of the funds incurs heavy penalties that wipe away the advantages of the higher interest rate.
Locking into a high-yielding CD at a fixed rate may turn out to be a double-edged sword when the environment is one of expected rises in interest rates. The attractive initial rate sometimes may make the future rise in rate make the CD less competitive as other investments come into the limelight. It is, therefore, key for investors to scrutinize very keenly the term length that they are entering into before committing and the environment pertaining to interest rates.
Conclusion
With low-interest-rate regimes, High Yielding CDs remain a valid investment asset class. Their returns are not as high as equities or real estate but can still grow savings on a low-risk basis and provide predictable income. High Yielding CDs will be very important to investors who need stability, such as retirement planning or to assure a steady inflow of funds. Always, however, special care must be taken on terms and general market conditions before any investment benefits can fully materialize.