As interest rates rose over the past two years, personal and corporate investors benefitted from elevated yields on their cash investments. However, the days of escalating cash returns may be ending soon.
The Federal Reserve has signaled several interest rate cuts this year, which, given enough time, would cause cash yields to fall from their recent highs. In light of these predictions, corporate cash managers must ask themselves: is it time to lock in today’s high yields before interest rates fall?
What does it mean to “lock in” rates for business cash?
“Locking in rates” refers to buying an investment with a set interest rate for a specified period of time – such as a Certificate of Deposit [CD] or bond. These investments guarantee that you will receive the stated yield for the term of the investment, even if market interest rates fall in the meantime.
Companies that buy a CD or bond at peak yields continue to receive a high rate of return for months or even years – depending on the length of the term. The interest income from these investments can help combat the effects of inflation and even add to profitability.
Why is now a good time to consider locking in rates?
To gain the greatest benefit from term investments, you need to buy at peak yields. While it is impossible to accurately predict the exact peak, guidance from the Federal Reserve suggests the U.S. is currently at or near this point. The latest Federal Reserve projections indicate three cuts to the Fed Funds Rate this year, with analysts predicting the first to come this summer.
Changes in the Fed Funds Rate have an almost immediate impact on government bond yields and have historically influenced CD yields as well. If the rate cuts occur as forecasted, yields for term accounts could fall quickly.
With interest rates slated to decline, it is an excellent time for companies to consider locking in the current rates. However, cash managers still face the challenge of choosing the right term investment that doesn’t sacrifice the safety of their cash.
How can businesses lock in rates while maintaining safety?
Both CDs and bonds allow businesses to lock in long-term yields, but they differ in a few key areas. Two of the most important differences are the returns and safety they provide.
CDs Often Provide Higher Returns Than Bonds
According to national averages, CDs with terms less than 5 years have historically outperformed similar Treasury bonds. Additionally, CDs with terms 5 years and longer have provided comparable returns to Treasury bonds of the same duration. However, these figures only consider the national averages.
CD yields vary widely between geographical regions and individual banks – making it possible to achieve much higher-than-average returns by shopping rates. These above-average yields can be significantly higher than bonds of a similar term.
Government Protection Provides the Ultimate Safety for Cash Reserves
The relative safety of a particular bond depends on its issuer. For example, Treasury bonds are issued by the federal government and are considered extremely safe investments. On the other hand, bonds issued by struggling companies or governments can be extremely risky. In fact, Fitch Ratings estimates that between 5 and 5.5% of high yield bonds will enter default this year.
For the ultimate safety, consider CDs issued by an FDIC or NCUA member institution. These government agencies are backed by the full faith and credit of the U.S. government and provide the strongest protection for business cash. Just be careful to stay below the $250k insurance limit or seek a partner that can provide access to extended protection.
Deposit Management Makes It Simple to Lock in Rates and Extended Safety
The coverage limit for FDIC and NCUA insurance is per financial institution, so there are options to obtain more coverage. However, your organization would need to maintain accounts at multiple financial institutions, which is time consuming – especially for companies with large reserves.
Thankfully, today’s businesses don’t need to invest in new staff and manage multiple banking relationships to achieve full government protection. Instead, the right deposit management company provides access to government insurance beyond the traditional limits and competitive returns – all with a single deposit and consolidated monthly statement.
Lock In Today’s Rates with A CD Term Account From ADM
At the American Deposit Management Co. [ADM], we specialize in CD strategies that are designed to capture nationally competitive returns while maintaining full government protection. Our experienced cash consultants can even customize a CD ladder that optimizes returns while providing liquidity to match your business needs.
If you already have CDs but want to optimize your returns, contact us about our CD ReFi program. We launched the program 2 years ago and have already helped businesses gain over $700 thousand in additional interest income.
To learn more about how ADM can help your company capture – and lock in – higher cash yields, contact us today.
*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.