CD investors may face sticker shock when it comes time to renew

CD INVESTORS MAY FACE STICKER SHOCK WHEN IT COMES TIME TO RENEW

Surprisingly, markets appear to have enthusiastically embraced the "higher for longer" mantra. At least, that's how Scott Wren, senior global market strategist at the Wells Fargo Investment Institute (WFII), sees it.

"This higher-for-longer mentality would have likely been a big headwind for stocks 12 months ago, but market participants continue to hang their hats on the themes of declining inflation over time and a Fed that wants to cut interest rates but likely won't have much of a chance to do so, at least over the balance of this year," writes Wren in a note.

In any event, moving into the summer and fall, Wren does see consumer price inflation "edging lower," allowing for two rate cuts this year. In 2025, WFII has adjusted down its projection for rate cuts to just one, which would bring the Fed funds target rate into the 4.5%-4.75% area by the end of next year.

Wren believes there are a couple of important implications for investors.

First, he says that those who have been putting their money in CDs need to keep in mind that they'll likely be facing lower rates when it comes time to renew their CDs. And as rates fall, he thinks parking savings in CDs is unlikely to keep up with price inflation in areas such as education and health care.

Therefore, he thinks it's unlikely CDs will replace other investments in long-term portfolios.

Second, looking out, Wren notes that yields are roughly the same on 5-year and 30-year maturities, which to him, means investors aren't being properly compensated for taking risk on longer-term instruments.

"That is why earlier this year we upgraded intermediate-term fixed income in an effort to capture most, if not all, of the yield of longer-dated securities," Wren writes.

WFII still prefers quality investment-grade fixed income, including Treasuries, corporates and municipals.

(Terence Gabriel)

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