Markets: News  

By Brett Arends

Looking for a safe place to save your money and earn a good rate of interest -- for one, three or even five years?

You can still get 5%, or near enough, despite the recent plunge.

So long as you shop around, naturally.

Most retirees are savers, and the recent collapse in interest rates isn't the best of news.

(Rates rallied a little on Thursday.)

Blame the out-of-nowhere banking panic, which has caused a plunge in interest rates right along the yield curve, from three months to 30 years.

One year Treasury rates BX: TMUBMUSD01Y, 4.83% last week, are down to 4.5%.

Five year Treasurys BX: TMUBMUSD05Y, which were paying 4.3%, are now paying 3.7%.

And 10 year rates have collapsed from 4.8% to 3.57%. BX: TMUBMUSD10Y

These are astonishingly fast moves for the bond market.

Interest rates are falling because investors are buying bonds for safety, driving up the price and driving down the interest rate. (Bonds work like a seesaw: When the price goes up, the interest rate goes down, and vice versa.)

And they are also falling because the market thinks the banking panic will take pressure off the Fed. Wall Street is now betting that the Federal Reserve is nearly done raising interest rates, and will start cutting them as early as July. In a matter of days, the money markets have slashed their year-end forecast for short term rates from 5.25% to 4%.

Naturally this could reverse itself just as quickly. You have only to look at how fast the money markets are changing their predictions to realize they don't know any more than the rest of us. Jay Powell said six weeks ago that he would rather keep rates too high for too long than cut them a moment too soon and risk reigniting inflation.

(The uncertainty is why I personally prefer inflation-protected Treasury bonds over regular ones. I see no reason to take on extra stress. Short-term TIPS look an excellent deal right now for anyone who wants effectively no real risk, paying a guaranteed interest rate of inflation plus 1.5% or more per year for the next five years. The low-cost exchange-traded fund iShares 0-5 Year TIPS Bond ETF, (STIP), is the simplest way to own them.)

But despite the wild swings in the bond market there are still some good deals out there.

Lots of banks are paying interest rates of about 5% on Certificates of Deposit, in some cases for up to 5 years: And so long as you stay within the $250,000 limit, your money comes with the same federal guarantee as the Treasury bonds paying far less.

The banks are still offering generous interest rates because they really, really want extra deposits right now--for obvious reasons.

The trick with CDs is to buy them through a brokerage account, because that's where you get the best deals. As of Thursday there were multiple one-year CDs paying 5.25%. American Express and Morgan Stanley were offering three-year CDs paying 5%. And American Express was offering a five-year CD paying 4.8%.

All these come with "call protection," which means you will actually get that amount of interest over the period. CDs without call protection can be redeemed early by the bank: You think you're locking in five years at 5%, and then after six months the bank closes out the CD and you suddenly get your money back.

-Brett Arends

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March 18, 2023 09:56 ET (13:56 GMT)

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