The era of 5% cash returns is ending early for some investors.
Before the Federal Reserve began cutting rates in September, banks offered certificates of deposit promising high yields for locking up cash years into the future. The highest-yielding ones, with returns in excess of 5%, had features allowing the bank to “call” them before they mature, handing back the cash and accrued interest.
Those features got little attention when rates were rising because banks weren’t about to call their CDs and borrow money at even higher rates. Now, banks including JPMorgan Chase and U.S. Bank are calling back more high-yielding CDs before they mature to save on interest as rates begin to fall, according to people familiar with the matter.
In the rush to lock in easy returns, many everyday investors likely purchased callable CDs without understanding what they were signing up for, according to Kathy Jones, chief fixed-income strategist at Charles Schwab.
“A lot of investors will look at just the yield,” Jones said. “We get people all the time who are like, ‘Wait a minute, my CD was called. What happened?’”
People who posted online about having their CDs called early expressed surprise after finding large deposits in their brokerage accounts. None wanted to talk with a Wall Street Journal reporter, perhaps embarrassed about not reading the fine print. “It was nice while it lasted,” one wrote on Reddit after having a 5.4% CD called by a regional bank that wasn’t supposed to mature until 2026.
Now, these investors also have to reinvest their cash at today’s lower rates. The highest offer for a 12-month CD on Bankrate earlier this week was 4.8%.
Though callable CDs are more attractive in the short term, they will likely underperform noncallable ones in the long run if rates go down, Jones said.
For example, if a $10,000 12-month CD with a 5% coupon purchased in December gets called two months early, it would return about $35 less in total interest than a 4.5% noncallable CD purchased at the same time, according to Bankrate.
Higher rate, higher risk
Most CDs aren’t callable, but the ones that are typically offer the highest rates. Advertised yields on callable CDs tend to be about 0.4% higher than noncallable CDs with the same duration, according to deposit research firm Curinos.
They are generally sold through brokerages such as Fidelity and Charles Schwab, which offer them on behalf of banks. About 18% of CDs bought and sold through Fidelity this year were callable, according to the brokerage.
A look at Fidelity’s brokered CD offerings early this week showed that all with 4% plus coupons and terms longer than a year were callable. Buyers would have to take coupons of less than 4% to have call protection on these CDs.
Savers poured more than $650 billion into brokered CDs since rates started rising in 2022, hoping to lock in risk-free returns, which peaked above 5%. The amount of brokered deposits in the banking system more than doubled in the past two years, according to FDIC data. Many regional banks loaded up on high-cost brokered deposits to ride out the banking crisis of 2023.
Unlike traditional CDs sold directly by retail banks to customers, brokered deposits are usually managed by bookkeeping teams at the bank that are more focused on keeping costs low than fostering long-term relationships.
When banks sell CDs through brokers, they can change the interest rates on large amounts of deposits without dealing with individual customers. Brokerages are responsible for alerting customers when a CD has been called.
Banks typically exercise their call options as soon as the prevailing rates dip below the interest they owe on CDs—even if the difference is small, analysts said.
“Banks are very efficient at refinancing their liabilities,” said Neil Stanley, CEO of CorePoint, a deposit strategy consulting firm.
How to avoid panicking
If you are just realizing you own a callable CD, you might be tempted to sell it so you can take the cash and lock in another investment before rates fall further. However, it is generally better to hold on, analysts said. Banks usually charge a penalty for early withdrawals, which could significantly reduce returns.
CDs typically trade at less than face value on the secondary market and brokerages may charge a transaction fee. If your CD is called, at least you’ll get your principal back with accrued interest.
Most people see CDs as set-it-and-forget-it investments, but those who own callable CDs must put in some work. The first thing to mark on your calendar is the call-protection period, or the initial period during which the bank cannot call your CD. These usually range from six months to a year.
Take note of the call schedule, or how often the bank has the ability to call the deposit. Some CDs can only be called once a year or quarter, and some can be called any day once the call-protection period ends. Knowing the frequency of potential calls can help you gauge how often to re-evaluate your options.
What happens to your money after a CD gets called depends on your brokerage and its default settings. One option is to set up your account so that deposits go into a money-market account, which can still offer a competitive return on uninvested cash.
With interest rates falling, it pays to quickly decide where to reinvest your funds. Look for other investments, such as noncallable CDs, Treasurys or high-yield savings accounts.
You’ll likely need to reinvest at a lower rate unless you’re willing to explore riskier investments like corporate bonds or municipal bonds.
As Jones said: “5% money with no risk is gone.”
