Investment in Callable Certificates of Deposit Carry Elevated Interest Rates; Regardless, We Continue to Advise Against Pursuing Them
In the ever-changing world of investments, a new opportunity has emerged for those seeking higher yields over a short period. Fidelity Investments recently offered a one-year callable Certificate of Deposit (CD) from JPMorgan Chase Bank, boasting an annual percentage yield of 4.3%. But what exactly is a callable CD, and should investors consider this investment?
A callable CD is a type of CD that gives the issuer the right to redeem it before it matures. This feature benefits the bank, not the depositor, as explained by Greg McBride, chief financial analyst at Bankrate. If rates go higher, it's unlikely that the bank will call the CD.
The higher interest rate on callable CDs is to compensate for the risk that the issuer may call back the CD and return the principal with the interest earned to date. For instance, the JPMorgan Chase callable CD cannot be called until November 2025, after which it can be called any month until maturity in 2026.
If your main goal is to get a bit more yield over a short period, a callable CD might be worth it, according to Ken Tumin, founder of DepositAccounts.com. However, if you're looking for simplicity, callable CDs may not fit the bill, as they can be more complicated and cumbersome compared to other investment products.
It's essential to note that if you use a CD ladder, a called CD could make you scramble for a substitute, potentially nullifying one of the big advantages of having a CD ladder. Additionally, don't confuse the CD's maturity date with its call date. The CD's maturity date may not be consistent with your investment time frame if the CD has a call date in the near future.
The federal government insures callable CDs, just like traditional CDs. However, the highest interest rate guarantee for a one-year callable CD is typically offered by select online banks or credit unions, with the rate and guarantee term varying. To ensure the highest rate guarantee, the investment must generally remain for the full one-year term.
Before investing in a callable CD, always look for the terms of the CD offering. Many brokerages allow you to screen out callable CDs, but it's crucial to check the details before you buy. In the case of the JPMorgan Chase callable CD, it has a minimum investment of $1,000.
Comparing the JPMorgan Chase callable CD to the current market, the average one-year CD yield in the current year is 2%, according to Bankrate.com. This means that the JPMorgan Chase callable CD offers a significantly higher yield. However, it's important to remember that the average one-year CD rate in January 2020 was 0.76%, highlighting the recent rise in interest rates.
In conclusion, while callable CDs can offer higher yields, they come with additional risks and complexities. Investors should carefully consider these factors before deciding to invest in a callable CD like the one offered by JPMorgan Chase.
Wall Street traders expect the rate-cutting cycle that began in late 2024 to resume later this year. However, the Fed's next move in the benchmark interest rate is likely to be a decrease, not an increase. This suggests that the higher yields offered by callable CDs may not last long, making it crucial for investors to make informed decisions.
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