Where to find top CD yields in the second half as Fed policy remains murky

May’s PCE inflation ran at a 4.1% annual rate (highest since April 2023), pushing Fed policy expectations less dovish: CME FedWatch implies ~67% odds of a September rate hike. In response, banks are fine-tuning deposit pricing, with average 1Y CD yields up 19 bps QTD and new-money 1Y CD rates ~35 bps above the group average (BofA). Deposit rates are being trimmed on high-yield savings accounts while boosted on CDs, and investors can lock yields of ~4.0%+ for 1-year CDs (e.g., Bread Financial 4.0%, Citi 4.0%; Popular Direct 4.15%).

Analysis

This is less about consumers shopping for yield and more about deposit beta re-pricing across the banking stack. A credible path to a hike forces banks to pay up for retained liquidity, which compresses NIM for funding-sensitive lenders while rewarding franchises with sticky operating deposits and fee income that can absorb higher short rates. The second-order effect is a continued migration from bank savings into T-bills/MMFs, tightening inexpensive funding availability for lenders even before a formal hike arrives.

Relative winners are BAC and C, where scale and deposit mix should blunt funding pressure better than smaller or more rate-sensitive peers. BFH and BPOP look more exposed: higher CD rates can squeeze spreads, and if household cash earns more with less effort, incremental consumer credit demand can soften as well. CME is the cleanest volatility beneficiary, but only if the market keeps repricing the path of policy; a one-off move in hike odds is not enough to sustain a volume tailwind.

The key catalyst window is 1-3 months: the next inflation prints and Fed rhetoric will determine whether banks keep lifting CD rates or whether this becomes a temporary marketing war. Contrarian view: the market may be overestimating the margin damage because large banks can delay pass-through on deposits and offset with slower loan growth, so the better trade is relative value rather than outright bearishness on the sector. Falsifier: a sharp drop in September hike odds or a clear downshift in PCE would unwind the funding-cost thesis quickly.

Key Decisions for Investors

• Long BAC / short BFH for 1-3 months: express the view that deposit franchises outperform consumer-finance funding costs as rates stay higher-for-longer; target 8-12% relative upside, stop if September hike odds fall below ~40% or BFH loan-loss/reserve trends improve materially.
• Long C / short BPOP over the next quarter: C should be more insulated from CD competition and wholesale funding repricing, while BPOP is more exposed to deposit beta and slower loan growth; use as a relative NIM trade, not a macro bet.
• Tactical long CME via call spread into the next PCE/FOMC window: if rate uncertainty persists, interest-rate volatility should support derivatives activity; risk/reward improves only if front-end implied vol stays elevated, otherwise this is a fade.
• Underweight regional-bank proxies such as KRE if the next inflation print stays sticky: the trade works if deposit competition spreads from promotional CDs into broader funding markets; cover if funding spreads normalize or the Fed pivots dovish.