It's Been 35 Years Since CDs Offered This Rare Opportunity

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When you invest in certificates of deposit (CDs), you typically have to agree to lock up your money for a long time in order to get the most competitive rates. That's because most CDs require you to leave your money invested for the entire CD term to avoid penalties. The term can be as long as five years.

Right now, though, you have a unique opportunity to get the best rates available by making a short-term commitment. This hasn't happened for around 35 years. Here's why it's happening now and why it pays to take advantage of this unprecedented situation.

Short-term CDs almost never offer the best rates -- but they do right now

When you take a look at the history of CD rates, the average yield offered by 5-year CDs has almost always been higher than the average yield offered by 6-month CDs. In fact, this was the case from 1989 all the way up through May of 2023.

There's a good reason for this, of course. You take a lot more risk when you agree to leave your money in a CD for five years. You're stuck if interest rates go up during that time, for one thing. And giving up the ability to access your money for so long limits your flexibility. That's why banks pay more when you promise them your money for longer. It's called the "term premium."

In May of 2023, though, this long-standing tradition came to an end. Starting then, 6-month CDs began offering higher average yields and have done so ever since. And 1-year CDs are also offering higher average yields than 5-year CDs, and have done so for a few months.

This is a major switch after around 35 years of long-term CDs consistently offering better rates. It's called an inverted yield curve, and it's an unusual phenomenon that doesn't happen very often.

Why is this a rare opportunity?

So, why does this unusual phenomenon present you with a rare opportunity? It's simple. You get to make a short-term investment, agreeing to leave your money invested for a year or less. And you get an extremely competitive return for doing so while taking on very little risk.

The Ascent's list of the best CD rates show there are multiple options for 6-month and 1-year CDs with rates around 5.00% or higher. These are FDIC-insured CDs, so you can't lose money on them as long as you invest less than $250,000 and don't withdraw your funds early. Being able to earn such a great rate with a virtually risk-free investment is all but unheard of -- especially since you aren't forced to make a long-term commitment.

If you buy one of these CDs, you're not agreeing to give up your money for half a decade; you'll be able to access your cash very soon if you need it. Your money won't be stuck in a CD for years on end if rates happen to go up more and better investment options become available. There's very little downside and a lot of upside, especially compared to in the past when you had to let the bank have your money for years just to reliably earn 2% or 3% on a CD.

If you have money you won't need for six months or a year, there's no reason to pass up this opportunity. Since it's been 35 years since the last time investors had this chance, it may not come around again for another few decades. Jump in now if you don't want to be left with regrets.

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