As of August in 2018, everything I'm reading is projecting rising interest rates for a while.

Assuming that this is what happens, is it better to deposit money into a shorter-term CD (at a lower interest rate now) with the expectation of redepositing into another CD later (at a future higher interest rate) or to deposit into a longer-term CD (at a higher interest rate now)?

I'm curious if there's any existing advice on something like this since I could otherwise fairly easily calculate the future interest rate required to make it worthwhile.

As an example, say a 4-year CD is currently offering 2.65% APY and a 2-year CD is currently offering a 2.5% APY. Over 4 years, the former would gain ~11%. Over 2 years, the latter would gain ~5%. Redepositing the 2-year CD into another 2-year CD would require a 2.79% APY. In other words, I'd have to expect interest rates to rise by ~11.6%, or ~0.2 points, over two years for it to make sense.

1 Answer 1


everything I'm reading is projecting rising interest rates for a while.

Then that expectation should be built into CD rates. In other words, the market's expectation of the change in interest rate in 2 years should make it an indifferent decision to buy a 2-year CD now and another 2-year CD in 2 years versus buying a 4-year CD now.

So the only difference is how rates actually rise relative to those expectations. If they rise more than expected, then you'd be better off buying short-term investments and reinvesting when they mature. If they rise less than expected (but still rise), then you'd be better off locking in the rate for a longer time.

If they rise exactly as expected, then it will make no difference.

Your math on the expected future rate is pretty close. The formula would be

(1+r(2,2))^2 = (1+r(0,4))^4 / (1+r(0,2))^2

Meaning the square of the expected 2-year rate 2 years from now is the current 4-year rate to the fourth power divided by the current two-year rate squared.

Evaluating that equation yields an expected 2-year rate in 2 years of 2.80%. If you think the rate will be higher than that in 2-years, then buy the 2-year CD. If you think it will be lower, then buy the 4-year CD.

  • "Then that expectation should be built into CD rates." But are they? These are consumer products, not bonds.
    – RonJohn
    Aug 14, 2018 at 21:29
  • @RonJohn That's a good point. They might not represent expectations as purely as bonds, but I'd still expect that banks would set the rates based on their market rates.
    – D Stanley
    Aug 14, 2018 at 21:53
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    I see three elements in determining the current market rate for a given CD: #1 The current Fed rate. #2 What other banks are offering. #3 Customer expectations of where rates will be in X months (which is just what you said). IMO, at this time, long-term rates aren't sufficiently high enough to get me to lock into anything longer than 12 months.
    – RonJohn
    Aug 14, 2018 at 22:01
  • I don't know a thing about the formulas for CD expectations. From observation, CDs of shorter duration are more responsive to interest rate increases than those for a longer term. The average U.S. CD for 1 year CDs has doubled in less than two years. The average for two year CDs has doubled in three years. The 4 year CD is up only 50% in that time period. It's not a linear relationship. In slow rising rate environment, tt might not make much difference in terms of the choice of two consecutive 2-years CDs versus a 4 year but for the guy laddered with less frequent maturities, it might. Aug 14, 2018 at 23:13
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    In general, the formula would be R(0,1) * R(1,1) * R(2,1) * R(3,1) = R(0,4)^4, where R(i,j) is 1 plus the expected j-year interest rate i years from now. So you have one equation with three unknowns, unless you can define two of the unknowns in relation to the other. Then the math gets even hairier.
    – D Stanley
    Aug 16, 2018 at 18:48

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