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Wait a Minute, My CD Was Called. What?

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By Vitalii Vodolazskyi @ Adobe Stock

Understand when you buy a CD, it may have a call provision, meaning the bank can pay it back early. Imani Moise explains in The Wall Street Journal:

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.

Action Line: When you want to talk about new ways to invest the money your bank no longer wants, let’s talk. Email me at ejsmith@yoursurvivalguy.com. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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