How Rate Cuts Affect CDs, Treasurys and Savings Accounts

Over the last couple of years, savers have enjoyed some of the highest yields in decades on savings accounts, bonds, CDs and other products. That may change next week.

On September 17th, the Federal Reserve will announce whether it will cut the benchmark interest rate. The Chicago Mercantile Exchange’s FedWatch tool, which uses market data to estimate the likelihood of different interest rate scenarios, currently says there’s more than a 90% chance the Fed will announce a rate cut on the 17th.

If interest rates are headed downward in the near future, how can savers preserve their yields? Below, we’re breaking down the interest rate sensitivity of a variety of different savings products.

Cash management accounts are online accounts that often combine features of savings accounts (such as high interest rates), checking accounts (such as debit card and direct deposit privileges) and brokerage accounts (such as the ability to directly purchase stocks, bonds or other investments with the money).

They are frequently offered by brokerage firms as a place to park uninvested cash and earn some interest on it. However, in recent years some institutions have started to offer freestanding cash management accounts that are not connected to an investing platform. (NerdWallet offers a cash management account via Atomic Brokerage with a 4.65% APY.)

Cash management accounts typically lend funds out to a network of banks, who in turn lend the money to their own customers to generate a yield. This multi-bank structure sometimes comes with another perk: Cash management accounts may have a higher level of Federal Deposit Insurance Corp. coverage than the typical $250,000 limit in a traditional bank account.

Moderately sensitive. The yields that banks earn on loaned money are tied to benchmark interest rates set by the Federal Reserve, which means that they may decrease if the Fed cuts rates in the weeks and months ahead.

However, some cash management accounts offer high APYs for a set period of time as a promotion for new customers, which may somewhat insulate their effective yields from Fed action.

Certificates of deposit are savings products offered by many banks and credit unions. They typically require you to commit your money to them for some period of time (which can be as short as a few months, or as long as a few years) and pay a fixed rate of interest over that time.

Pulling money out of a CD before maturity can result in an early withdrawal penalty, which may involve forfeiting some number of months of interest. However, some CD early withdrawal penalties may eat into the principal of the CD, leaving you with less money than you put in.

Not sensitive at all. Traditional CDs lock up your money and pay a fixed yield until maturity, which can make them an appealing option for savers in an environment where interest rates are expected to decrease in the near future. However, rates on new CDs will fall once the Fed lowers its rate. 

High-yield savings accounts typically pay higher interest rates than the traditional type of savings account you can open at a bank branch. Many are offered by online-focused financial institutions that have few physical branches. This lets them save on overhead costs and pass the savings onto customers in the form of higher yields.

Unlike cash management accounts, high-yield savings accounts typically don’t come with features like debit cards or brokerage account integrations. And like traditional savings accounts, there may be a monthly limit on how many transfers you can make out of them. They are typically offered as standalone products for short- to medium-term saving.

Fairly sensitive. Like cash management accounts, high-yield savings accounts generate their yield through bank loans, whose interest rates are tied to benchmarks such as the federal funds rate. That means high-yield savings account yields may decrease if and when the Fed cuts rates.

Also like cash management accounts, some high-yield savings accounts offer “APY-boost” promotions for new customers. However, many of the highest-yielding savings accounts do not, and others offer a cash bonus to new customers rather than an increased yield.

Money market accounts are savings-like accounts that pay high (but often fast-changing) interest rates.

The “money market” refers to the market for ultra-short-term loans among banks, large companies and government agencies. These loans often have maturities of just days or weeks; large institutions use them to cover day-to-day expenses such as payroll. Money market accounts (and money market mutual funds) pay a yield by investing in these securities.

Very sensitive. Money market securities are fast-maturing loans to large, creditworthy organizations, which means their interest rates are very closely tied to benchmarks such as the federal funds rate.

It also means that there’s rapid turnover in the pool of securities that money market accounts invest in, which causes money market yields to move almost in sync with benchmark rates. If the Fed cuts benchmark rates by 0.25 percentage points later this month, the yields on money market accounts are likely to quickly drop by about that same amount.

Treasury bonds are loans to the U.S. government, one of the most creditworthy borrowers in the world. Short-term Treasury securities (known as Treasury bills or T-bills) are typically sold at a discount to their “face value” (the amount of money you’ll get when the bond matures). The yield of a T-bill is based on the difference between the purchase price and the face value. Longer-term Treasury bonds make regular interest payments to investors until maturity.

Almost all brokerage accounts offer some kind of Treasury bond fund (exchange-traded funds and/or mutual funds), and some offer individual Treasury bonds for purchase. You can also buy individual Treasury bonds directly from the government at TreasuryDirect.gov.

Another way to earn interest from Treasury securities is through a Treasury account, a savings-account-like product that automatically invests in T-bills. (NerdWallet offers a Treasury account through a partnership with Atomic Invest, and one of the brokers we review, Public, also offers a Treasury account.)

The sensitivity of Treasury bonds depends on how you’re investing in them. An individual bond, if held to maturity, has a fixed yield, regardless of what happens to benchmark interest rates.

But if you’re investing in bond ETFs or bond mutual funds, you’re likely investing in a pool of bonds with various maturity dates. A fund’s yield may fluctuate as the underlying bonds reach maturity and get rolled over into new bonds, which means that the fund’s yield may decrease if benchmark interest rates fall in the months ahead.

Treasury accounts generally offer investors the option to keep their money in specific Treasury bills until maturity, providing a fixed yield for the lifetime of the bill. But if you pull your money out before your T-bills mature, and then put it back in later, you may not be able to lock in the same yield as before. Yields may also change as bills mature and get rolled over.

If you’re interested in individual bonds as a fixed-yield savings vehicle, it’s important to note that not all brokers offer them — some only offer bonds in the form of ETFs.