Online banks, which have offered some of the richest annual percentage yields on savings products, are slashing the interest they pay. The Federal Reserve’s rate hikes, dating back to March 2022, allowed investors to benefit from richer yields on Treasurys, CDs, high-yield savings accounts and money market funds. Though the 1-year Treasury bill is yielding about 4.78%, select institutions will offer upward of 5% to hold your cash in a 1-year CD. This week, five banks under Wells Fargo ‘s coverage trimmed the interest they pay on their 1-year CDs. “We believe banks are repositioning their CD rates ahead of potential Fed rate cuts in 2024,” said analyst Michael Kaye in a report on Friday. Indeed, the Federal Reserve has penciled in three rate cuts for this year. Fed funds futures pricing suggests about a 47% chance that there will be a cut at the March meeting, according to the CME Group . Falling yields Banks cutting rates this week include Ally Financial , which is now offering an annual percentage yield of 4.9% for a 1-year CD, down from 5.15%. Synchrony Financial lowered its APY by 30 basis points to 5%. Bread Financial is leading the pack with a 1-year CD APY of 5.5%. See below for a table of where online banks now stand on 1-year CD rates. The upshot is that even as yields have come down, they are still high from a historical perspective: You’re still getting paid to stash emergency funds or idle cash. Wells Fargo scanned the online banks under its coverage and found the average APY for a 1-year CD was 0.64% in March 2022. That number is now at 4.89%. The risks of staying in cash Investors hiding in cash right now are seeing reinvestment risk play out: That is, as rates come down, they run out of places to obtain competitive yield. They also risk missing out on any capital gains from rallies in bond prices if their portfolios remain heavy on cash — and in turn, this will drag on portfolio performance. Financial advisors and strategists have been trying to nudge investors to add longer-dated bond exposure, rather than sticking around in cash, to lock in some yield while the getting is good. “Historically, it has paid to be proactive and switch from cash to bonds well ahead of the first interest rate cut,” wrote Mark Haefele, global chief investment officer, wealth management at UBS, in a recent report. “Cash tends to outperform bonds during the first stages of rate-hiking cycles (as we saw in 2022) but underperform in the later stages and during rate-cutting cycles,” he said.
