Savers hoping to earn some more yield on their idle cash are running out of places to stash their money as banks trim the rates they’re willing to pay on deposits. Traders are coming around to the idea that the Federal Reserve will take a slow approach to cutting interest rates, but banks have already been preparing for the shift in policy. Consider that last week, Discover Financial lopped off 5 basis points from the annual percentage yield it offers on its high-yield savings account, bringing it down to 4.3%. Of the banks under Wells Fargo’s coverage, Discover was the first to trim its online savings account rate for this rate cycle, according to analyst Michael Kaye. Banks are also lowering the rates they pay on certificates of deposit, which allow customers to lock in rates for stated periods. Bread Financial dropped the APY on its 1-year CD to 5.35% from 5.5%, while Ally Financial cut its yield to 4.8%, a 10 basis point reduction. One basis point is equal to one one-hundredth of a percent. It’s a marked turn from when online banks jockeyed for customers’ deposits as the Fed began raising rates in March 2022. “This hike cycle, given the Fed’s high level of hawkishness and velocity of rate hikes, there has been noticeable pick-up in deposit rates on CDs for all durations,” said TD Cowen analyst Moshe Orenbuch in a Feb. 6 report. “That said, given that rates have likely peaked and that we are now close to the beginning of a rate decline cycle, online banks have started to lower 1-year CD rates noticeably across the board over the past few weeks, even though the Fed funds rate has remained the same,” he added. Too good to last See below for a table of online banks and the APY they’re offering on savings accounts. The catch with savings accounts is that banks can opt to tweak their yields at any time. However, even as rates are cooling, they’re still richer than what institutions were paying prior to the Fed’s rate hikes. The average online bank under Wells Fargo’s coverage was paying an APY of 0.5% on savings accounts, and that number was 4.48% as of Feb. 8. As rates come down, investors will want to think about their plans for cash they have on the side. Lump sums you need in the next 12 months might be best held in a high-yield savings account or a money market fund. Cash that’s earmarked for periods beyond the next 12 months might be best invested into fixed-income holdings that give you the benefit of locking in today’s higher yields. For instance, you can build a bond ladder — a portfolio of issues with staggered maturities — using Treasurys. Though a ladder would mean you’re reinvesting the proceeds of your maturing bonds at a lower rate, you’ve already locked in the higher yields on the longer-dated bonds you purchased. Investors hoping to play a lower rate environment with exchange-traded funds may want to consider buying intermediate-term bond funds . This way, you manage reinvestment risk in a falling rate environment and you get the added benefit of rising bond prices within the underlying portfolio, as bond prices and yields move opposite one another.
