Insights + Resources

Step-Up CD

Feb 12, 2020

clipart walking up stairs gray white background CD
They allow you to take advantage of rising interest rates.

When interest rates start to climb, will these be the CD to own?

Step-up certificates of deposit (also called  rising-rate CDs) are fixed-income investments with a bit of wiggle room. When you have CDs with a step-up provision, you have a chance to exchange the initial yield for a better one as interest rates rise. Given currently underwhelming long-term CD yields, what CD owner wouldn’t want that option in the future?

How does the step-up work?

As an example, let’s say you buy a 48-month, rising-rate CD today offering an initial yield of 0.6%. Let’s say that two years from now, the interest rate on that CD moves north to 1.6%. The step-up arrangement allows you to get the 1.6% yield.

This is different from a traditional laddered CDs strategy, in which you buy multiple CDs of varying maturities in an attempt to get higher rates of return with liquidity.  Since interest rates have been so low right now, a CD laddering strategy would not have the same effectiveness. Step-ups give you the potential for at a better long-term return with the same CD.

You may have to notify the bank to get a step-up.

On some of these CDs, the step-up kicks in at predetermined intervals or when interest rates move up. Other banks and credit unions allow you to voluntarily request the step-up; these variants are sometimes called bump-up CDs. In both cases, there is usually a restriction that you are only allowed so many step-ups during a specific interval or during the term of the CD.1

If you believe CD rates will rise frequently in the near future, then an automatic step-up may make a lot of sense to you. On the other hand, if you only get one automatic step-up per eight months or year, you may grow frustrated at not getting them frequently enough. If you only get one step-up per CD term and you can choose when you want it, it might be better to wait than to leap at the first opportunity.

It’s also worth noting that relatively few banks offer step-up CDs. Check with your financial professional if you are interested in going further.

CD for inflationary times.

Conservative investors who fear being stuck with subpar yields in the near future might want to take a close look at step-up CDs. They do offer the potential for CD investors to keep pace if inflation accelerates.

 

Tags: , , ,

More Insights

Apr 21, 2021

Recently, you may have seen reports that a record-low number of homes are available for sale—roughly 1.03 million nationwide. If you compare that to the average number of homes for sale during the past 10 years, it’s no surprise that many hopeful homebuyers are having issues securing a home. But why exactly is the housing … Continue reading “Forces Driving the Housing Market”

Apr 19, 2021

It can be exhausting trying to keep up with the whims of Wall Street. Lately, the financial markets have been fixated on federal taxes and what may be proposed on Capitol Hill in the weeks and months ahead. Wall Street’s focus on taxes closely follows its attention on the 10-year Treasury yield. And it wasn’t … Continue reading “The Whims of Wall Street”

Apr 16, 2021

President Joe Biden introduced the much-anticipated American Jobs Plan, which outlines an approach to spend roughly $2.2 trillion on the nation’s infrastructure and other projects. As part of the legislative process, the Biden administration also laid out a proposal for paying for the domestic investment. The plan includes raising the corporate tax rate to 28% … Continue reading “Paying for the Infrastructure Bill”

Apr 14, 2021

Financially, many of us associate the spring with taxes – but we should also associate December with important IRA deadlines. This year, like 2020, will see a few changes and distinctions. December 31, 2021, is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.

Apr 12, 2021

There’s an old Wall Street maxim that says, “markets climb a wall of worry.” And these days, there’s plenty to worry about with the trend in long-term interest rates and bonds.

Insights + Resources >