What happens when banks cut your high-yield CD short? Understanding the risks of callable CDs.
The End of High-Yield CDs?
For a short period, savers enjoyed certificates of deposit offering yields exceeding 5%, locking in these rates as banks tried to attract more deposits. However, with the Fed now lowering interest rates, some banks are "calling" back these high-yield CDs earlier than expected.
When a bank calls a CD, it returns the investor's money, including any accrued interest, before the scheduled maturity date. Big names like JPMorgan Chase and U.S. Bank are among those recalling high-yield CDs to reduce their interest expenses, according to reports.
What Are Callable CDs?
Callable CDs are a special type of deposit that gives banks the right to redeem them before their maturity date, something many savers may not have fully understood when purchasing them. When interest rates were on the rise, banks had no reason to call these CDs. However, now that rates are falling, banks are looking to save money by calling back high-interest CDs and issuing new ones at lower rates.
Many everyday investors, attracted by the appealing returns, may have overlooked the callable nature of these CDs. As Charles Schwab's chief fixed-income strategist Kathy Jones notes, "Many investors only focus on the yield, without realizing their CDs could be called back early."
Impact on Investors
Some investors, surprised by these early calls, have shared their experiences online. One user on a forum expressed disappointment after their 5.4% CD, originally set to mature in 2026, was called back early by a regional bank. “It was nice while it lasted,” they wrote, reflecting the sentiment of those who had hoped for long-term returns.
With their CDs being called early, these investors are now forced to reinvest their funds at lower interest rates. As of this week, the best rate for a 12-month CD on Bankrate was 4.8%, a noticeable decrease from the previous 5% highs.
Callable CDs often offer higher returns initially, but they tend to underperform non-callable CDs over time when rates drop. For example, a callable CD that gets called early may earn less in total interest compared to a non-callable CD with a slightly lower rate that runs to full maturity.
Why Do Banks Offer Callable CDs?
Callable CDs usually come with higher yields to compensate for the risk that the bank might call them early. Research from Curinos, a deposit research firm, suggests callable CDs offer rates about 0.4% higher than non-callable ones with similar terms.
However, this increased return comes with the risk of early redemption.
Most callable CDs are sold through brokerages like Fidelity and Charles Schwab, making them easy to purchase but sometimes tricky to manage. According to Fidelity, about 18% of the CDs traded through its platform this year were callable.
Investors drawn in by the attractive yields may not have fully understood the callable nature of these products.
The Risks of Callable CDs
When interest rates dip below the rates that banks are paying on callable CDs, they often exercise their right to call them, reducing their costs. "Banks are highly efficient at managing their liabilities," explains Neil Stanley, CEO of CorePoint, a consulting firm that focuses on deposit strategies. This means that when it’s advantageous for banks, they will act quickly to refinance their liabilities—calling back CDs to replace them with lower-yielding alternatives.
Savers who bought callable CDs to lock in high returns may now find themselves reinvesting their funds at lower rates than they had planned. Callable CDs, while initially appealing, carry hidden risks that investors should consider before purchasing.
What to Do If Your CD Gets Called
If you hold a callable CD, you may be tempted to sell it before it gets called, especially as interest rates continue to fall. However, selling early can often lead to penalties or reduced returns. Experts generally recommend holding onto the CD until the bank calls it, as selling early could result in additional costs or fees.
Brokered CDs, like those purchased through companies such as Fidelity, often trade at less than their face value in the secondary market, and brokerages may charge transaction fees for early sales. On the bright side, if the CD is called, you will receive your initial investment back, along with any interest earned to date.
Investors should also be mindful of the “call-protection period,” which is the window of time during which the bank cannot call the CD. These protection periods generally last between six months and a year. Once this period ends, the bank can call the CD on a pre-set schedule—whether that’s annually, quarterly, or even daily.
Understanding when these calls might happen can help investors plan their next move.
Planning Your Next Investment Move
When your CD gets called, it’s important to act quickly. With interest rates trending downward, reinvesting sooner rather than later may help you secure the best available rate. Consider looking for non-callable CDs, U.S. Treasury's, or high-yield savings accounts to park your cash in a more stable investment.
However, reinvestment rates will likely be lower than what you previously had, unless you’re open to exploring riskier options like corporate or municipal bonds. As Kathy Jones of Charles Schwab puts it, “5% money with no risk is gone.”
Callable CDs can seem appealing because of their high initial returns, but they carry significant risks that are important to understand. With the Federal Reserve cutting rates, many investors are now finding themselves in a position where their high-yield CDs are being called back earlier than expected. If you're holding callable CDs, now is the time to evaluate your next steps and plan for reinvestment, as falling interest rates will likely present fewer high-yield options moving forward.
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