As the Federal Reserve rate cuts near, investors will likely soon see the juicy yields on their cash start to tumble. In fact, banks have already started to slash their payouts. Last week, three online banks cut their 1-year CD rates, according to BTIG. The biggest decline came from Capital One , which decreased its CD by 50 basis points to 4.5%. One basis point equals 0.01%. Marcus by Goldman Sachs cut its rate by 15 basis points to 5% and Sallie Mae shaved 5 basis points off its CD to 5.1%. Meanwhile, Synchrony slashed its online savings rate by 10 basis points to 4.65%. Federal Reserve Chair Jerome Powell said after the central bank’s July meeting that a September rate cut is “on the table.” The market is anticipating the likelihood of at least a quarter percentage point cut at that time, according to the CME FedWatch Tool . As banks prepare for the Fed’s move, they are focusing more on cutting CD rates, which are locked in for the term of the product, BTIG analyst Vincent Caintic wrote in a note Sunday. “We believe online banks are intentionally trying to shift customers toward savings rates, which are floating, over term rates,” he said. “With greater confidence in Fed rate cuts (and perhaps several by the end of the year) we think online banks will have greater confidence cutting deposit rates over the next several weeks,” he added. What to do with your cash There are a number of ways to maximize your cash yields. First, you should consider not just the interest rate you’ll be receiving, but how much liquidity you’ll need, said Christine Benz, director of personal finance and retirement planning at Morningstar. “Yields are somewhat ephemeral — what we have on offer today may not be there in three months,” she said. While buying a CD is a good way to lock in rates, you lose liquidity and will pay a penalty if you need to access that money before the end of the term. If you need the option of immediate access, high-yield savings accounts are often the best for instant liquidity, Benz said. You can also consider a money market fund . The annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds is 5.11%, as of Monday. With both high-yield savings and money market funds, the rates can fluctuate. Another thing to consider is if you want the guarantee of insurance through the Federal Deposit Insurance Corp. CDs and savings accounts are typically FDIC insured for up to $250,000 per depositor, while money market funds are not. One way to deal with the liquidity issue and lock in some yield is to do CD ladders, if you have your cash needs staked out, Benz said. For instance, you can buy 3-month, 6-month and 9-month CDs to get varying maturity dates. Another option for wealthy investors is municipal bond funds, which are free of federal taxes, she said. For Winnie Sun, co-founder and managing director Sun Group Wealth Partners, laddering assets makes the most sense for her clients. “It helps clients achieve some level of liquidity because in most cases they don’t have a direct need for that money, but they like the idea of having some liquidity,” said Sun, a member of the CNBC Financial Advisor Council . Money market funds are a part of every single ladder she creates. Then she’ll turn to brokered CDs, which are offered through brokerage firms and not banks, and in some cases, municipal bonds, if the investor is in a higher tax bracket. She’s been buying brokered CDs at varying terms up to 1.5 years. Certified financial planner Cathy Curtis , CEO of Curtis Financial Planning, divides up her cash buckets depending on needs. She would keep a month or two of expenses in a bank savings account for easy access, although the yield is minimal. Then, she would keep another six months of expenses in a high-yielding account. While she recommended high-yield savings accounts in the rising-rate environment, she is shifting gears somewhat — depending on the need for cash. “With the likelihood of Fed rate cuts starting in September, it makes more sense for clients to check out CDs or T-bill rates that can be locked in for a year or more,” said Curtis, also a member of the CNBC Financial Advisor Council. That said, if they are going to need the money more immediately, she suggests a high-yield savings account. Curtis has also been utilizing money market funds and a Treasury floating rate bond exchange-traded fund for clients for a portion of their fixed income allocation. However, she is starting to reduce those allocations and is moving into an aggregate bond ETF and flexible income ETF, as well as 1- to 2-year Treasury bills, in anticipation of rate cuts.
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