Cash makes a comeback as interest rates move higher

How to find best payouts on CDs, savings accounts

With interest rates on the rise — and expected to climb even higher— plain-old cash is looking more alluring to savers and conservative investors.

A savings account stashed with cash was the place to be for people who wanted to sleep at night during the 2008 financial crisis. Its value held steady while the stock market crashed — losing more than half its value — and home prices collapsed.

But it quickly fell out of favor when the Federal Reserve cut interest rates to zero to make borrowing cheaper and revive the U.S. economy. While pushing rates to historic lows gave stocks, real estate and other risky assets a steroid-like performance boost, it amounted to a death sentence for cash and certificates of deposit.

The reason: It caused the interest payouts on cash to virtually disappear, hurting savers, conservative investors and retirees who relied on income from their savings.

But cash returns are inching higher again and becoming more attractive as the Fed moves to return rates to historically normal levels. At its next meeting on June 13, the Fed is likely to hike rates for the second time this year and boost its key borrowing rate to 2%, up from 0% back in late 2008. And Wall Street sees more hikes this year and next, pushing up the central bank’s key rate to an even more attractive 3%.

That’s not to say savers will make a killing if they invest in cash or CDs, however.

“Interest rates are heading in the right direction for savers — but you have to know where to look to get the highest yields,” says Greg McBride, chief financial analyst at Bankrate.com, a site that tracks the highestyielding deals offered by banks and other financial institutions.

You also have to do some research, McBride adds. “You are leaving money on the table if you are not shopping around for the best rates,” he says

Cash savings accounts

Heads-up to yield seekers: Big, well-known banks are stingy when it comes to boosting interest on savings and money market accounts. After years of seeing profits dinged by low rates, the big banks, which are flush with deposits, are demanding higher interest payments from borrowers but not extending higher rates to savers.

“If you are sitting back waiting for your bank to bestow higher yields on you,” McBride says, “you are likely to be disappointed.”

The average national yield on savings accounts, for example, is a measly 0.09%, and 0.18% for money markets, according to Bankrate.com, despite that the Fed’s key short-term rate is now pegged between 1.5% to 1.75% and is likely to rise again next week.

So where are the deals? Look for banks that are competing for deposits, such as online banks or digital financial companies. That’s where you’ll land the highest and most competitive rates.

Certificates of deposit

The highest-yielding one-year CD tracked by Bankrate now yields 2.35%, which is the best return in nine years.

But with rates likely to move higher, the best strategy to profit from CDs, McBride says, is to buy ones with shorter maturities, such as one-year or two-year offerings. That’s because longer-dated CDs don’t offer yields that are much higher. The top-yielding two-year CDs, for example, now yield 2.75%, which is almost as much as a three-year CD at 3% and a five-year one at 3.10%. It makes little financial sense to lock yourself into a long-term CD when you can get a comparable yield on a shorter-term one that will mature sooner.

Checking accounts

About half of checking accounts don’t pay a penny of interest, and those that do pay very little. So if you just sold your house or a winning stock and are using your checking account as a parking place for your profit, you’re missing out on interest dollars you can get from higher-yielding savings accounts or CDs.

U.S. government bonds

Lending the U.S. government your money is always a safe bet because the American government has never defaulted on its debt. It’s an even better bet now with the 10-year Treasury note yields around 3%, which marks a four-year high. It also delivers a return that is a full percentage point above inflation.

And the investment is less risky than stocks. Even if the 10-year note falls in value, and its yield rises, an investor that holds the bond to maturity will get all of his or her money back barring a government default.