Fed Holds Rates Steady - Deposit Rate Predictions and Strategies

POSTED ON WEDNESDAY, MAY 2, 2018 BY Ken Tumin

As expected, no policy changes were announced today at the end of the two-day FOMC meeting. The Fed decided to hold off on a rate hike, but a rate hike in June still looks very likely. The language in the FOMC statement describing the economy supports the continuation of the Fed’s gradual rate hikes. A few small changes in the statement language may be seen as increasing the odds of four rate hikes in 2018 (instead of just three). One is the change in the description of inflation:

The March FOMC statement stated the following on inflation:

On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent.

This changed to the following in today’s FOMC statement:

On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.

All of the voting FOMC members voted in favor of today’s policy action. This shows there are no strong inflation hawks who were willing to go against the majority in favor of a rate hike at this meeting.

June Fed Rate Hike Odds at 100%

The odds of a June Fed rate hike continues to be a sure thing according to the Fed fund futures as shown by the CME Group FedWatch Tool, the odds of a 25-bps rate hike in June is now 95%. The odds of a 50-bps rate hike in June is now 5%. Thus, the odds of at least a 25-bps rate hike in June as shown by the Fed funds futures is 100% which is the same has it has been for the last two weeks.

The odds that the federal funds rate will be at least 75 bps higher in December (four Fed rate hikes in 2018) declined slightly from yesterday, falling from 48.6% to 46.0%. The markets are indicating about a 50-50 chance that the Fed will hike four times in 2018 rather than the three that the Fed’s median expectations suggest.

Future FOMC Meetings

The next three FOMC meetings are scheduled for June 12-13, Jul/Aug 31-1 and September 25-26. The June and September meetings will include the summary of economic projections and a press conference by the Fed Chair.

Deposit Account Rate Predictions and Strategies

An important issue for savers is the decision of how much of their savings should go into long-term CDs vs short-term CDs and savings accounts. Long-term CDs are increasingly becoming less attractive as short-term rates rise more than long-term rates. However, we have seen some upward movement on long-term CDs this year.

Today’s Top Deposit Rates

Below are today’s top rates for nationally-available savings account, 1-year CD and 5-year CD:

Top Savings Account Rate:

2.00% APY, Popular Direct, Exclusive Savings - New Account Rate

Top 1-Year CD (term equal to or close to one year):

2.35% APY, Synchrony Bank, 14-month CD Special, $2k minimum

Top 5-year CD (term equal to or close to five years):

3.10% APY, Northwest FCU, 5-year CD, $100k min, under 62

Note, please refer to this blog post for the ranges of APY available for Northwest Federal Credit Union’s 5-year CD.

Future Top Deposit Rate Predictions

How might these deposit rates change in the next two years? I’m refining my analysis that I did after the January Fed meeting.

Let’s take a look back in history to help predict what we may see. A similar condition existed back in 2006 and 2007 when the Fed was hiking rates. I took a look back at my weekly summary in January 2007, and the top 5-year rate was 6.25% APY at PenFed. The top 1-year CD rate equaled the top savings/money market account rate. AmboyDirect offered the top 1-year CD rate of 5.50% APY, and Superior Savings (which was acquired by Capital One) offered the top savings/MMA rate of 5.50% APY. At this time the federal funds rate was 5.25%.

It’s interesting to note that today’s top saving account rate (2.00% APY) exceeds the top range of the federal funds rate (1.75%) by 25 bps. This is similar to what we saw in 2007. Let’s assume this trend will continue and there will be a savings account with a rate that’s 25 bps above the top range of the federal funds rate.

As you can see in the 2006-2007 rates, top CD rates may not be much higher than the top savings account rates. Long-term rates heavily depend on inflation and economy expectations. Low inflation expectations can lead to a flat yield curve without much difference between short-term and long-term rates. Based on what economists are saying and what we’ve seen in the past, I think a gradual flattening of the yield curve is likely.

Let’s assume we get two more Fed rate hikes in 2018 and three more in 2019. That would result in a federal funds rate in a range of 2.75% to 3.00% near the end of 2019. Let’s assume internet savings account rates exceed the federal funds rate in a pattern similar to both today and back in 2007. Also, let’s assume the top 5-year CD rates will be slightly higher than the top internet savings accounts. I think it could be anywhere from only 0 bps to what we see today (110 bps). For the sake of simplicity, let’s assume a range of 50 to 125 bps. So based on these assumptions, we can make guesses about the top internet savings account rates and top 5-year CD rates at the end of 2018 and 2019:

Possible Rates by the End of 2018:

federal funds rate: 2.00% to 2.25% (assumes 3 hikes in 2018)
top internet savings account rate: 2.25% to 2.50%
top 5-year CD rate: 3.00% to 3.75%

Possible Rates by the End of 2019:

federal funds rate: 2.75% to 3.00% (assumes 3 more hikes in 2019)
top internet savings account rate: 3.00% to 3.25%
top 5-year CD rate: 3.75% to 4.50%

Top 1-Year CD vs. Top Savings Accounts

If we do see rates rise as shown above, how would today’s top CDs compare to keeping your money in a top savings account?

I’ll estimate the average earnings in a top savings account by taking the average of today’s top rate (2.00%) with the estimated top rate when the CD matures.

For 1-year CDs, today’s top rate is 2.35% APY (14-month) at Synchrony Bank. The estimated top savings account rate 14 months from now is about 2.75%. The average of 2.00% and 2.75% is 2.38% which is close to Synchrony Bank’s 14-month CD rate.

As you can see, there may not be any advantage with choosing 1-year CDs instead of savings accounts today. Of course, this assumes rates keep rising in the pattern described above. Any shock to the economy that causes the Fed to pause rate hikes would give the advantage to today’s CDs.

Another thing to consider is the level of effort. I’m assuming you’ll keep your money in top savings accounts. Today’s top savings account rarely holds that position for long. You should anticipate that you’ll need to move your money roughly every six months to achieve the average rate estimated above. In the case of Popular Direct, you may not need to move your money, but you may have to still open a new account (see blog post).

If rates should happen to rise more than my estimates above, the advantage would go with savings accounts. Another nice thing about savings accounts is that they make it easy to take advantage of hot CD deals. You can quickly use money from your savings account to fund a hot CD. Of course, deciding if a CD is hot in a rising interest rate environment is difficult. Many readers did not look favorably at PenFed’s 6.25% long-term CDs back in 2007.

5-Year CDs with Small Early Withdrawal Penalties

Another thing to consider is 5-year CDs with small early withdrawal penalties. These are not the deals they used to be. With short-term rates rising faster than long-term rates, the effective yields of 5-year CDs closed early are lower than shorter-term CDs held to maturity. But they’re not so much lower that this strategy should be totally discounted. You can see how Ally Bank’s 5-year CD closed early compares to top shorter-term CDs held to maturity using our CD Early Withdrawal Calculator. I also included a top 5-year CD rate with an EWP of six months' interest (2.85% APY at MainStreet Bank). As usual, beware of banks and credit unions with disclosures that give them the right to not allow an early closure, and beware of the possibility that a bank or a credit union will increase the early withdrawal penalty on existing CDs.

Comments

Sort by Date | Sort by Votes

85 Comments.

Mak | May 2, 2018 | Comment #1

They're going to have a hard time raising rates if they can't get the 10 year yield higher imo.

You are correct | May 5, 2018 | Comment #82

#1, Raising rates is not a solution for the country, sure it is good for the savers, but there is always a price to be paid later.
It crates a chain reaction starting from the banks when issuing personal or business loans, then it continues down to local level and prices of everything is adjusted upwards, so what ever we make extra as savers, we cough it up on higher goods and services, it becomes catch 22 issue.
Furthermore, who is going and how to pay the interest on the national debt with higher interest rates, present cost is $460 billions to the taxpayers per year and rising fast. Global devaluation of the dollar already started from energy and commodities and since we import most of the goods sold here, a price increase is already underneath our feet, but we are blind and celebrate the few extra dollars from the savings accounts.
Our government recycles the national debt in short term instruments and when the short term interest reaches the long term, we have created another problem, foreign investors will pull out of the treasuries and we have to start to print money to cover the already printed money's interest due now.
I'm for balanced approach and do care what happens to our accumulated dollars, if they fall faster in value than the added values to them, what is the point to save a falling dollar?

deplorable 1 | May 5, 2018 | Comment #83

@You are correct: We have discussed this topic at length and scottj's comment #28 is a great example of how it is still better to have higher rates providing you have savings. Inflation has been here all along with 0% rates and is hidden in things like the price of a new house or car, the incredible shrinking food packaging, insurance prices etc. You bring up valid points about the debt which is exactly why many of us were so angry about Obama adding 10 trillion to the debt along with 8 years of 0% rates with no benefit for us savers. Now Trump is being blamed for the interest on the debt that he did not even create. The real solution is not lower rates but cutting spending and paying down the debt. Our government as in BOTH parties needs to be more fiscally responsible with our tax dollars. 0% rates was never a solution to unsustainable debt and does nothing but encourages more debt to both governments and consumers alike. Now the real question is do we want to encourage debt or savings. Correct me if I'm wrong but was it the savers or the debtors that were responsible for the housing and subsequent financial crisis.

Response to deplorable 1 | May 5, 2018 | Comment #86

#83, It is to late for balance approach to the national debt and the interest rates. We have to chose between great country or banana republic. It looks like we all gonna pay a hefty price on long run, nobody is exempted.
Savers are becoming greedy, the politicians are dumb and selfish, the other agencies are corrupt to the bone.
The smart persons are being ignored and the polarization on national level is to intense for any compromise as a solution to the problem. God, save this nation, it is the our only hope now.

Bogie | May 5, 2018 | Comment #87

@#86, No, savers haven't become greedy, for the past several years borrowers had become addicted to artificially low interest rates and now it appears the withdrawal symptoms aren't going to be pleasant for those who thought there would be no end to that easy money.

Don't count on God saving our nation. The politicians and bureaucrats on all levels are doing everything they could to kick Him out of our government offices, schools and all other public places. May God save us as families and individuals.

Bozo | May 2, 2018 | Comment #2

"Long-term CDs are increasingly becoming less attractive as short-term rates rise more than long-term rates."

Amen.

Of course, the issue is how short, and at what term? With INOVA's 14-month at 2.3% being "the canary in the coal mine", I'm looking forward to more short-term (i.e., 18 months or less) at or above 2.5%.

lou | May 3, 2018 | Comment #3

Bozo, did you see the private message I sent you last week?

Bozo | May 3, 2018 | Comment #21

Lou, re comment #3, I did not see that PM. I just replied. My apologies.

anonymous | May 3, 2018 | Comment #4

Ken, I appreciate the analysis. Do you expect anything to affect rates differently this time around, compared to 2006-07?

For example, I've been reading about excess reserve deposits recently. As you probably know, the Fed started paying banks interest on excess deposits in 2008. Excess reserves were $2 billion in 2006, and are now $2 trillion! So to some extent, many banks already have more money on deposit than they loan out.

Since the Fed pays these banks at the top of the Fed funds rate for these excess reserves (1.75%), it might limit the rates that banks are willing to pay on additional deposits ... otherwise, they don't have a profit margin for those deposits.

deplorable 1 | May 3, 2018 | Comment #5

Nice analysis and very timely post Ken. This is in line with my thinking that locking in CD's with terms of 2 years or less is the way to go(for now). While still keeping some liquid cash in high yield savings to take advantage of a special deal. Liquid cash is also key for bank bonuses which can easily beat even the best CD offer. What will be tricky is determining when to lock up 5-10 year CD's when the FED is done hiking. I timed this right last time and still got shafted when the banks that I had my long term CD's with went belly up and I got checks from the FDIC. Hopefully we won't be seeing too many bank failures this time around.

mix | May 3, 2018 | Comment #6

I've noticed a trend that many banks seem to be raising their CD rates in the weeks leading up to a Fed. meeting where there is a high chance of a rate hike. This is opposed to waiting until after the Fed. hike is officially announced. I wonder what is up with that?

Nelly | May 3, 2018 | Comment #14

google buy the rumor sell the news. it is not a new concept.

mix | May 5, 2018 | Comment #79

These are CD's not stocks...

Blissful Ignorance | May 5, 2018 | Comment #80

To dumb it down, here you can see Fed Watch shows a 100% probability there will be a rate increase in June.

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/

1 year treasury yields increased 15 basis points in April. Because 100% of investors in federal funds futures expect a rate increase.

It is true, treasuries and CDs are not stocks, but obviously, it is the same exact net result.

Boop | May 4, 2018 | Comment #67

Banks typically peg CD rates to benchmark rates like LIBOR - LIBOR rates increase in advance of Fed funds rate hikes

#68 - This comment has been removed for violating our comment policy.

anonymous | May 4, 2018 | Comment #77

Thanks for pointing out LIBOR rates. Why are we letting a few banks in London dictate our interest rates anyway? (Looks like LIBOR will be phased out in 2021!)

mix | May 5, 2018 | Comment #78

Thanks for the info.

Blissful Ignorance | May 5, 2018 | Comment #81

Are treasury yields rising above of fed meetings for the same reason?

Inflation Hawk | May 3, 2018 | Comment #7

Well, is this a timely post or what? I just had a two year CD mature this month.
It was yielding 1.5% when purchased. Most of the current 2 year CDs are yielding around 2.5%.
That's a 1% bump in 2 years. Or, 0.50% per year. Or, 0.25% per 6 months.

If the same scenario continues your estimate of 2.5% for 2018 and 3.0% for 2019 looks reasonable.
Of course, this means that the banks grudgingly pass along some of the FED increases to us folks.

If the raises are in 0.25% increments every six months, the 2 year 2.50% CD comes out ahead.
It's just not possible for the rate differential to be made-up over a 2 year period of time.

rzelman | May 3, 2018 | Comment #9

In Ken's comparison of savings v. the short term CD it may be difficult to achieve the average rate of 2.38 as different banks will invariably vie for the highest rates and frequent transferring of funds may result in a lower average yield due to delays in linking new accounts, loss of interest during ACH transfers and limits or ceilings on withdrawals. Seems a better bet to take the easy 2.35 that Synchrony is offering unless you know you will need the funds earlier than 14 months.
Also, if interest for the CD is paid in 2019, the tax on it won't be due until April, 2020

DAJunky | May 3, 2018 | Comment #10

RE CD tax postponement:
Isn't this true only if you aren't required to make 2019 quarterly estimated tax payments?

rzelman | May 3, 2018 | Comment #23

Tax is payable for the year it was credited not accrued. A saving account pays interest monthly so the tax will be due during the same year it was credited. If the CD matures in 2019 and the accrued interest is credited only at maturity, the tax will be due April 15th 2020 regardless to whether you pay quarterly or not.

DAJunky | May 4, 2018 | Comment #57

According to Syncrony's posted 'standard' disclosures:
– Interest is compounded on a daily basis and CREDITED to the CD on a MONTHLY basis
Is there an alternate disclosure, possibly pertaining only to the 14 mo. special CD
you suggested, that specifies CREDITING ONLY AT MATURITY?
If so I couldn't locate!

However, IN EITHER EVENT, I'd anticipate receiving two 1099-INTs (or possibly 1099-OIDs) reporting credited (possibly so-called 'phantom') interest paid (separately) for 2018 and 2019 tax years.

Attempted April 2020 deferral of those two payment obligations seems a potentially
attractive IRS penalty target invite.

For those who haven't already done so, I'd highly recommend perusing Ken's very informative article relating to this topic:

https://www.depositaccounts.com/blog/cd-interest-bank-1099int-forms-and-taxes.html

anonymous | May 3, 2018 | Comment #8

One strategy I'm considering is to keep investing in 5-year CDs with 180 day EWP's. If the 5 year rate goes up by 1 percent from when I locked in the CD, I'd break the CD and get the new rate. This way, I would end up with 3-4% 5-year CDs at the top of the interest rate cycle, hopefully.

But I'm also considering staying short (savings accounts, money market funds, short-term bond funds) and locking in mid-to-long-term bonds near the end of the interest cycle. That way, if rates drop, the bonds appreciate it value. If rates were to continue to rise, the bonds would yield more after some time.

john | May 3, 2018 | Comment #11

these rates are still a joke ,they are a gift to bank earnings, whose tax rate just went down by 14 %, this country is starving the seniors

Pied Piper | May 3, 2018 | Comment #12

3% is the magic number. It's barely sustainable, considering debt, debt and more debt incurred by every nation on the planet. The piper will be paid!

SolonHiker | May 3, 2018 | Comment #16

Yeah, the country is starving seniors after paying their Social Security, their Medicare, giving them tax breaks on their federal and state returns, charging them less taxes for investment income than younger people pay for working. Young people are working three jobs, sharing squalid little apartments, paying and paying for college loans, over paying for healthcare. It's a tough thing to be an oldster and have more money than you know what to do with. Oh, the inhumanity of it all!!!!

Bogie | May 3, 2018 | Comment #17

Oh, you mean all those young people dressed in their designer clothes sitting around in Starbucks sipping on the Caffè Latte while conversing on social media with their several hundred dollar ipads? Oh, the pity of it all!!! We must start a "Go Fund Me" site for those poor, poor young people.

deplorable 1 | May 3, 2018 | Comment #20

Excuse me but those seniors PAID for their SS and Medicare through many many years of payroll deductions. The tax breaks are debatable but the lost interest from decades of savings is a REAL loss of income. Nobody held a gun to your head and forced you into taking out college loans. Take some personal responsibility for your own situation in life and stop blaming others. Some of us spent decades working and saving and were expecting to live off of interest and/or dividend income in retirement only to get a slap in face with 0% rates.

DCGuy | May 3, 2018 | Comment #25

"For most of the past decade, as the U.S. economy marched through the second-longest expansion in its history, Americans enjoyed a rare trifecta: soaring stock values, cheap loans and consumer prices that rarely rose.

That favorable climate benefited everyone from people nearing retirement to those buying their first homes or just filling their gas tanks.

But suddenly, the good fortune is melting away, imperiling the props that have supported American economic confidence and incomes and intensifying pressure on President Trump to deliver the faster growth and higher wages he has promised."
https://www.washingtonpost.com/business/economy/rare-trifecta-of-soaring-stocks-cheap-loans-and-low-inflation-coming-to-an-end/2018/04/30/77d57f66-496c-11e8-8b5a-3b1697adcc2a_story.html

According to this article, the good times for the past decade between 2008 to 2018 are over.

deplorable 1 | May 3, 2018 | Comment #39

@DCGuy: Those were not good times for me! I was fully invested prior to the stock crash of 2008. No I didn't sell at a loss but broke even after many years after the crash. My house is paid for and I never had any debt so loan rates never benefited me. Pre Obama I used to average 6% in interest. I call those 0% years the lost decade.

Manshow | May 5, 2018 | Comment #85

Let’s be honest..the amount put in for SS and Medicare is nowhere near the benefits being enjoyed....

deplorable 1 | May 6, 2018 | Comment #90

@Manshow: That may have been true for the first people who collected benefits early on that didn't pay(or didn't pay much) into the system. Now days though you will be lucky just to live long enough to get back what you paid in. This is why they keep raising the age to collect and telling people to wait until they are 70! They want you to die off before collecting benefits. Then to add insult to injury SS benefits are TAXABLE. This is a tax on top of a payroll tax.

Cashman | May 3, 2018 | Comment #13

I have chosen to put some of my available funds (60K) into Navy/Army C.U. 30 month 2.75% APY with 6 month E.W. penalty.Still have about the same amount of funds in Popular Banks 2:00% APY for future increasing Cd rates. I'm 60 Y.o and at my age and health condition I'm keeping my CD's maturity time lines @ 2 - 21/2 years. These shorter term CD's allow me to be less concerned about any E.W. penalties.

reply to cashman | May 4, 2018 | Comment #69

Cashman, I have been thinking along the same lines. And if Navy Army pays an annual dividend, as it has in the past, then that 2.75APY will effectively be a little higher.

agletdave | May 3, 2018 | Comment #15

Can anyone tell me what the best "No Penalty" CD rates are currently. That would be a nice upgrade of info, especially in a now? raising rate environment.

Reader1 | May 3, 2018 | Comment #18

agletdave, CIT Bank 11 month no-penalty CD at 1.85% APY, but you can get that rate or better in an online savings account with Salem Five Direct or Popular Direct.

robinhood | May 4, 2018 | Comment #48

check out the money market fund at vanguard, it pays almost 1.9% no need for a CD

deplorable 1 | May 3, 2018 | Comment #19

Another scenario that may play out is that we have a strong inflationary surge causing the FED to hike rates faster and higher than previously anticipated(basically throw the dot plot out the window). With the new tax cuts, low unemployment, wage increases and rates still fairly low the stage is set for a inflationary rebound. This is another reason to stay short on CD's and keep some liquid cash on hand. The FED would not want to mention this as even a possibility because it would spook markets and cause a massive sell off in stocks. This would be a unexpected scenario to most but I see this as a real possibility.

gregk | May 3, 2018 | Comment #22

Something to hope for in your estimation? With what rationale?

rzelman | May 3, 2018 | Comment #24

Don't forget that inflation means higher prices for nearly everything you consume so rising rates in that environment is at best like treading water to keep from drowning.

scottj | May 3, 2018 | Comment #26

So bread, milk, gas and such cost more with inflation..does not bother me. Those extra costs are peanuts compared to how more I get when CDs pay 5-6% instead of 1-2%. Inflation does not effect all equally

Nelly | May 3, 2018 | Comment #27

Get real scottj.

Anyone who "invests" in CDs is not going to benefit from inflation.

Inflation does not impact a few household items, it impacts everything. The interest earned is worth less than the year before.

scottj | May 3, 2018 | Comment #28

Lets say you have $3 Million to invest in CDs, at 2% that's $60k a year, at 6% that's $180k a year. Most of the things that will get effected by higher inflation prices are not going to be $120k. In fact many of the the things I buy keep getting cheaper like electronics. And healthcare which can rise sharply with inflation wont for me thanks to getting more in tax credits as healthcare rises. Also I have zero debt so rising borrowing costs means nothing to me. I did much better back when we got 6% CDs.

Nelly | May 3, 2018 | Comment #29

scottj rambles: "Most of the things that will get effected by higher inflation prices are not going to be $120k"

It is silly to pretend a dollar today buys as much as a dollar in 1995, just because computers have gotten cheaper.

Just because you don't spend it, does not mean the dollar has not lost value.

scottj | May 3, 2018 | Comment #31

All I'm saying is inflation does not effect all the same.

Nelly's Dad | May 3, 2018 | Comment #30

It is downright strange to get so much certain investment advice from people who invest in CDs.

If people are so confident in your financial outlooks, you should be able to find much more profitable investments.

scottj | May 3, 2018 | Comment #32

I already made millions and am here because I now want zero risk investments, why are you here?

Nelly's Babysitter | May 3, 2018 | Comment #33

And, zero risk investments are not going to exceed the rate of inflation, over time.

scottj | May 3, 2018 | Comment #36

Lets say my yearly expenses is $80k a year and inflation is 3%, so that means I spend an extra $2,400. Pretty sure that extra $120k in interest I make covers that

anonymous | May 3, 2018 | Comment #38

Nelly (comment #33), not true. I had a nice 5-year TIPS back in the 2006 time period that had a real yield of about 2.5%. Zero inflation risk and practically zero credit risk.

I sold it for a nice little profit when real yields tanked, but I probably should have held onto it longer, because everything I've had since then has been zero or negative real yield.

Now we just need to figure out how to make real yields return to normal levels!

Nelly's Girlfriend | May 3, 2018 | Comment #40

Anonymous, you may be confused, but yes, the fact that you are referencing a single event from 12 years ago actually demonstrates the rule, that "risk free" investing and profitable investing are distinct.

anonymous | May 4, 2018 | Comment #46

Nelly, your trolling comments are not very constructive. I hope you can learn from our past successes (and mistakes) that we are sharing here. The point I was making is that historically, risk-free investments had a term premium significantly more than zero. (It was not an isolated event that only occurred once 12 years ago.)

The reason for the vanishing term premium are academically debatable (I challenge you to find some articles and read about this). But if we can understand the reasons, we will understand if and when normal term premia will return. And exactly that will be the time when you'll want to lock in longer-term rates.

#47 - This comment has been removed for violating our comment policy.

anonymous | May 4, 2018 | Comment #50

Nelly, you may want to study up on "ad hominem attacks" before you try to tackle the world of fixed income.

Contrary to what you got out of my comment#46, I do not know the exact cause and timing of long-term interest rate trends. Some of the causes related to the financial crisis might be transitory, others could be structural/global changes that are more persistent.

#58 - This comment has been removed for violating our comment policy.

Inflation Hawk | May 4, 2018 | Comment #53

It's not a single event. 5 year TIPS yields have been over zero for over a year now.

I think the point being made here is that if you're retired and have a revenue stream that will last you until you die, taking-on investment risk is unnecessary.

If you're young and single, that's the time to take big risks.

Inflation Hawk | May 4, 2018 | Comment #52

TIPS do. That's kind of the point. Zero risk. Low real yield.
Right now, a 5 year TIPS yields around 0.7% over the inflation rate.

Kyle | May 9, 2018 | Comment #91

New to the forums. What is TIPS? Treasury?

DCGuy | May 9, 2018 | Comment #92

Welcome. You can read about TIPS on this link.

ttps://www.investopedia.com/terms/t/tips.asp

You can obtain information about all of the US Treasury securities on this link.

https://www.treasurydirect.gov/indiv/products/products.htm

deplorable 1 | May 3, 2018 | Comment #43

@Nelly's: I earn a 24% dividend yield in one of my investments but retirees can't put all their eggs in the stock market basket and expect to stay retirees. A balance of safety and risk is required. It doesn't matter how many millions you have you can still get wiped out with a few bad moves. 0% interest rates forced many otherwise CD investors into a risky stock market they knew nothing about. I know a few who lost their retirement savings in the market.

Mad Off | May 4, 2018 | Comment #51

Is that you Bernie?

anonymous | May 3, 2018 | Comment #35

scottj and deplorable, I think really what we have to hope for is a return of higher "real interest rates" or "term premium" or "risk premium" or whatever you might call the rate that the bank pays you in addition to inflation.

A good measure of the real interest rate is the TIPS yield. I went and looked up 5-year TIPS yields for the time period when we had 6% CDs available in 2006/07. TIPS yields were hovering around 2.5%. Today, they are only 0.7%.

So, the reason we did well with our 6% CDs back then is not primarily because inflation spiked. It's because we got a real rate on our money. (Literally and figuratively 'real'.) The 5-year forward inflation rate at the time of the 6% CDs was about 2.3%, not much higher than it is today.

Bozo | May 3, 2018 | Comment #42

Anonymous (re comment # 35) a "real rate of return" after taxes and inflation is virtually impossible these days. I gave up longing for a RRR in deposit accounts long ago. Deposit accounts are my "anchor to windward", protecting against exogenous events and the craziness of the market. I take risk on the equity side of my portfolio. Some years, it works; others, it does not. That said, when it does not "work", I know I have enough in my deposit accounts to pay the bills and fund my RMDS, without tapping my equity positions.

Inflation Hawk | May 4, 2018 | Comment #54

The actual inflation rate back in 2006 3.2% and 2007 was 2.8% (forward inflation rate is a fiction).
That 6% CDs real yield was only 3%. So, if TIPS yields were 2.5%, the spread was only 0.5%.

You used to be able to beat inflation with a 3 month Treasury.
Once we get to that benchmark, things will be back to historical averages.

Right now, inflation is 2.4%. It takes a 2 year Treasury to beat that.
So, we're still a long way from "normal" (but things are at least headed in that direction).

anonymous | May 4, 2018 | Comment #56

Inflation Hawk (comment #54), you are right about the forward inflation rate, it's the difference between nominal and TIPS bonds yields on any given day which "forecasts" inflation over the coming years.

The Jan 2006 5-year forward inflation rate was 2.3%, and actual inflation from 2006-2011 turned out to be 2.1%. So, it wasn't that far off.

deplorable 1 | May 3, 2018 | Comment #41

I agree 100% Scott. There are many ways to fight inflation but not many to fight 0% interest rates. The stock market is great but offer no guarantees.

Inflation Hawk | May 4, 2018 | Comment #55

No guarantees of gain - or, principal. I'm too old for that stuff.

Bozo | May 3, 2018 | Comment #34

With respect to comment #26 from poster "scottj", it is true that the effects of inflation are not uniform. Several years back, I developed (in a rare fit of boredom) the CPI-P, or the personal consumer price index. One takes the CPI-U and strips out the inapplicable items, augments as necessary, then develops a "personal" index. Amazing what the results are. Do it yourself.

DOA | May 3, 2018 | Comment #37

Also with respect to comment #26 from poster scottj, he already made millions, so he must be doing something right.

deplorable 1 | May 3, 2018 | Comment #44

@gregk: Like I said before I prefer high inflation with high interest rates. Say Inflation spikes way up to 10% and the FED hikes rates and I lock in a 10% CD. Then inflation goes back down to 2-3% again I'm still earning 10%. This has happened before. Then I use my 2-5% tax free cash back credit cards and shopping networks(another 10% off) for purchases. Inflation doesn't really effect me that much with no debt or loans. Low inflation is no substitute for loss of income. In other words you can't spend low inflation but you can spend interest earnings.

Bozo | May 4, 2018 | Comment #45

deplorable 1 (re comment # 44), high CD rates and high inflation rates benefit the creditor class, no doubt. Not ashamed to say I'm in the creditor class, with little debt, and much to be gained by both.

deplorable 1 | May 4, 2018 | Comment #49

@Bozo: I think those who have loans and large adjustable rate mortgages thought that 0% rates were here to stay. Us prudent savers were thrown under the bus to feed the debtor class. They said that we didn't "deserve" 5% on savings so I say why do they deserve 3% loans? My first home loan was @ 7.125% and that was a 7 year balloon deal because the normal rates were 8% on a 30 year fixed. Back then you could get 7-8% CD's though.

deplorable 1 | May 4, 2018 | Comment #59

The jobs numbers are out and although a bit mixed were pretty good and should provide support for 4 rate hikes this year. The U.S. economy added 164,000 jobs while the unemployment rate fell to 3.9%. 193,000 jobs were expected. Wage gains were 2.6% for the year and 2.7% was expected. With the unemployment rate already this low and a shortage of qualified skilled workers in many fields I don't think we can expect blowout new jobs numbers. I do expect wage growth to accelerate in the near future due to the tight labor market.

Harry Arm | May 4, 2018 | Comment #60

Wow!

Thanks!!!!

¢ ¢ ¢ | May 4, 2018 | Comment #61

probably the only wage growth we,ll see is in pennies earned for longer hours worked per week.

¢ ¢ ¢ | May 4, 2018 | Comment #72

#62
you got deleted
sorry i missed that
can you reiterate in a non deleted tone
my guess it was DP1

deplorable 1 | May 5, 2018 | Comment #84

Historically speaking a tight labor market leads to wage increases as employees can demand higher pay or move jobs because they are plentiful.

#62 - This comment has been removed for violating our comment policy.

Kingist | May 4, 2018 | Comment #63

I am not sure how people are executing it but you can get a one year risk free German bond at over 3% now in USD. That is because the forward currency curve pays 3% back during the one year period.

111 | May 4, 2018 | Comment #64

Yep. For more info -
https://www.wsj.com/articles/why-americans-are-getting-paid-to-invest-abroad-1525344194

alan1 | May 4, 2018 | Comment #70

The WSJ article cited by 111 says nothing about "a one year risk free German bond at over 3% now in USD" mentioned by Kingist. I have no idea if such bonds exist. The WSJ article is about currency transactions in euros, not German bonds. The article states:

"The mechanics of the currency forwards mean that a U.S. investor can use $120.80 to buy €100 today, and then use a forward contract to sell that €100 for $124.60 in 12 months—a 3.14% return on the initial expenditure..."

alan1 | May 4, 2018 | Comment #71

Continuing Comment #70: The only German bond mentioned in the WSJ article is this:

“If you want to buy a 10-year German bond from the U.S., you can get about 3.5%. They’ve got no issuance issues, probably a supportive central bank, no inflation issues,” said Jon Day, fixed-income portfolio manager at Newton Investment Management.

10 years at 3.5% is a far cry from one year at 3%, regardless of risk or whether the bond is denominated in euros or dollars.

deplorable 1 | May 4, 2018 | Comment #73

The one year German bond is NEGATIVE .6% or so and what about the foreign currency conversion fee? Not getting this strategy at all.
https://www.investing.com/rates-bonds/germany-1-year-bond-yield

anonymous | May 4, 2018 | Comment #75

Looks like it's more profitable to just hold Euros in cash rather than investing in a bund!

There's also a thing called Eurodollar deposits, which I think are foreign bonds denominated in USD. Maybe they are referring to this?

iamaroc | May 4, 2018 | Comment #74

Outstanding synopsis, I'm impressed.

John Sears | May 4, 2018 | Comment #76

I don't see anyone mentioning CD laddering I have some CDs that are at a lousy 2.05%, I'm wondering if I should try laddering at 1, 2, 3 and 4 years. Would that be preferable to a lump sum at 5 years?

Personal for Scottj | May 5, 2018 | Comment #88

Scottj, I read all of your posts regarding interest rates and inflation, believe me, we are all equally affected by it. It may not seams to you obvious at first, but it will hit you one day when bail-in is implemented or the value of the dollar slides 3 times faster than your interest received on the CDs. Look at Argentina 40% inflation, it may come here sooner or later, reason, Argentina lived on borrowed money, same as we do, Argentina printed money to pay the interest on the already borrowed money, same is going on here, Argentina had trade imbalance equivalent to USA trade imbalance today, Argentina chose to devalue the Peso, same is coming here for the dollar, so, your money, no matter how much you cherish them will lose the value faster than you can count to 3 (it may happen overnight).

deplorable 1 | May 6, 2018 | Comment #89

You can't realistically compare the U.S. to Argentina, based on the size of their economy alone it is apples to oranges. The value of the dollar needs to be compared to a basket of other currencies. If other currencies around the world go down the value of the dollar goes up and vice versa. This is in constant flux just as the stock market. If you look at the long term chart since 1971(When Nixon took us off the gold standard) the value of the dollar has had massive swings both up and down.
https://tradingeconomics.com/united-states/currency
Click on historical and max.
The long term trend is slightly down but as you can see there have been many times that the dollar has bucked this trend. There is a reason that the U.S. dollar is viewed as a safe haven currency around the world and this is because it has held up well against a basket of currencies over long periods of time. In fact just recently the value of the dollar has been trending up. So it is possible to have higher interest rates while at the same time having a strong dollar.

#93 - This comment has been removed for violating our comment policy.