Is It Time?

chaser14 | Dec 25, 2022 | 61 posts since 2019

Good Morning & Merry Christmas everyone. In light of this quote “Be careful if you’re waiting for higher long-term CD rates. As we have seen in the last two months, they may not get any higher, and it’s quite possible that they could fall.” from Ken’s CD Summary on 12-21 what is your opinion on jumping on a direct bank 4 year and 5 year CD right now? I could make more than I’m making with the Fidelity Premium Class Money Market. I really want a few more long term CD’s.

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Answers

JeffinEasternFL | Dec 25, 2022 | 744 posts since 2020

The Fed is not done, there's still supply (inflation) issues lurking and at some point, the recent Fed increases must choke down the money supply and all this consumer demand. Me: I'm waiting and hoping! Long term CD's: 6%? Nope, 5.5% probably not, 5%+ (selectively appearing here and there later winter and spring time) I think so. In the meantime, Merchants Bank of Indiana has my $$ at 4.08% APY insured to $1M! Merry Xmas!

elbow1 | Dec 25, 2022 | 4 posts since 2022

I have put money into long term cds. I didnt get the absolute highest rates but they are much better rates than a couple of years ago and they provide steady predictable interest. Merry Christmas to everyone.

Rickny | Dec 25, 2022 | 1,296 posts since 2017

No one can predict the high point of rates. I would put some money in CDs now and save some if rates go higher. Like a CD ladder

A few years back when rates hit around 4% some said wait until they hit 5%. The 5% never happened.

Choice | Dec 25, 2022 | 937 posts since 2020

While most may want higher long term rates …where is the need for greater FI funding for new loans notwithstanding Fed movement on rates? Where is the new business activity?

CDMD | Dec 25, 2022 | 141 posts since 2022

Here is what I am watching and reading -articles that relate to drops in consumer savings as Covid stimulus savings fade and are replaced with credit card debt. Hence the credit card intensive asset FIs are leading the need for deposits and rate increases. I think this sites reported rates by those FIs supports that premise. Thinking here of Bread, Capital one, Discover, Syncrony, etc and in parallel Sallie Mae As holidays spending gifts bills come due in January this might push for a need in deposits to fund those FI assets books. Coupled with international deposits being withdrawn from US to be repatriated back to Europe and Asia as their rates increase may have a funding crunch in US. Also BOJ maybe tightening too. Just weaving my research and readings into a potential hypothesis for higher rates on the long end. But all could be offset by fading inflation. How sticky inflation will be once it gets down to 4ish percent sometime next year will be the key. Thoughts? Happy holidays

Choice | Dec 25, 2022 | 937 posts since 2020

All/most short term needs are cited and with the current rates (some may say a result of conspiracy of FIs) ..no long term loans are needed... The problem will be in FIs being in a bind when/if posters stop, i.e. withdraw, short term $s from FIs....but everyone/most bought into the notion of short term rates. Some, i.e. all, could have had a plan B with/for prior maturing funds at maturity...they didn't have a plan B! If higher long term rates are wanted, at this time, then hope for more inflation fire, that will drive business to get loans, etc. before rates get higher!!!

CDMD | Dec 25, 2022 | 141 posts since 2022

Credit card debt assets are not short term fundings. Those assets don’t amortize pay down as fast as might be suggested. International funds withdrawals are long term funding implications. Of course everyone should have a plan b and c and d. I was simply displaying a liability issue not an asset generation need. Thx

Choice | Dec 25, 2022 | 937 posts since 2020

Thanks...but then, the Q is...why are rates not rising? I provided my thoughts. We'll see

planxy | Dec 26, 2022 | 140 posts since 2013

I will try not to shock anyone. When market interest rates are rising, banks and especially credit unions raise their depositor rates, but not fast or as high as to match. When market rates are falling, financial institutions drop depositor rates faster and further like stones. Source: myself, Federal financial and financial institution economist.

sams1985 | Dec 25, 2022 | 781 posts since 2022

If you’re comfortable with the current 4/5 year rates available and they work for you, it’s time now.

If you will be happier getting into something closer to 5% (whether that materializes or not) then it’s not time yet.

chill08 | Dec 26, 2022 | 96 posts since 2022

Hi, I'm there with you. I have one 60 month I caught in nick of time near 5%. I have recently been opening the shorter term 5% but finally decided to open another 60 month at the current rates. My concern is once the 12-24 year terms come due, there may not be good rate to roll into. I'm fine with under 5% for 5 years.

fred_b | Dec 26, 2022 | 172 posts since 2022

The Fed is likely approaching the point of diminishing returns where inflation no longer comes down at the recent pace but remains elevated. So what does the Fed do then? They either have to leave somewhat restrictive rates in place for longer or continue to bump them up further.

Inflation isn't necessarily on a one-way glide path to 2% and may get stuck at a considerably higher figure.

Whatever your opinion you can find articles from supposed experts to support your position.

I got a 5 year CD at 4.86% but I'm keeping some investable cash in reserve in case rates go higher. I also got a 5 year TD Bank bond that isn't callable for 1 year at 5.85%. Even if it's called I'm making 5.85% for a year.

w00d00w | Dec 27, 2022 | 360 posts since 2012

does that TD Bank bond have a "bail-in" feature, which allows either cancellation of the debt or conversion to stock in a situation where the institution becomes financially distressed?

lou | Dec 27, 2022 | 1,004 posts since 2010

Long-term treasury yields have been steadily climbing this past week. The 5-yr treasury is almost 4%.

John19 | Dec 27, 2022 | 395 posts since 2022

Looks like long-term CD rates won't go higher than 4.6% and not lower than 4.25% for a while, maybe all year. It may make sense to keep MMF's until long-term rates go below 4.25%. Five and seven year CDs look good too.
If MMFs averaged 5% all year (very unlikely) and you got 4 years of 4.25% after this year, it would still only equal a 4.4% 5 year CD you could buy now. My math is probably bad though.

CDsuckers | Dec 27, 2022 | 70 posts since 2022

I always put CD rates in the context of the inflation rate.
I actually preferred the low interest rate environment coupled with the lower inflation rate that we had prior to 2020.
The main reason for that is I had a 1% spread over inflation (2021 and 2022 turned that into a -4% annual spread) .
How good the current rates are depends totally on how high inflation will be over the term of a new CD.
Currently, the Cleveland FED's Nowcast has the quarterly annualized seasonally adjusted CPI set at 3.47%.
Looking forward, you need a 4.47% CD to beat "guesstimated" inflation by 1%.
What inflation will actually be is anyone's guess. And, that's the problem with CD's now. They're vulnerable to big inflation losses.
That's why I converted almost all of the CD's I had maturing this year into TIPS.
The yields on those TIPS have averaged around 1.5% (plus the future unseasonally adjusted CPI-U).
All of the ones that I've bought have had an inflation adjusted price below par value.
Since TIPS held to maturity have a par value floor, that provides some deflation protection.
I'm only purchasing CD's for terms that don't have TIPS available with an inflation adjusted price below par.
Just recently, I snagged a 3 year CD for 4.9% that I need to fill-in a hole in my IRA RMD ladder.
Will that beat inflation?
Who knows?

w00d00w | Dec 29, 2022 | 360 posts since 2012

i really like this idea, focusing on real rather than nominal return. however, if trying to buy a TIPS with an adjusted price below par that matures sometime in the next 10 years, there are few options. of the 37 TIPS maturing in that interval, only 4 (maturing in '27, '31, and '32 X 2) currently have adjusted prices below par.

CDsuckers | Dec 29, 2022 | 70 posts since 2022

Yup, it's just those 3 years.
However, the 10/15/27 went below 100 for a short time today.
For maturities greater than 5 years, I just cover my RMD requirements.
For that 2027 one, I've been dumping whatever I have available.
Heck, I might even still be around when it matures.
I've always liked CD's for their simplicity and the ease of taking RMD's.
In the past, they always beat inflation (even if it was only by a crummy 1%).
But getting clobbered by inflation the last couple of years has caused me to boost my TIPS allocation.
I've alway had some TIPS but the negative yields during the last decade made me stop buying more.
I actually would have done better with the TIPS with negative yields over the CDs.
Now that the yields are back over 1%, I decided I'd better take advantage of the situation.
A 4% or 5% CD may beat inflation again.
But, I'd rather take the guaranteed yield while it's available.

lou | Dec 29, 2022 | 1,004 posts since 2010

i can understand why you want to buy TIPS right now if you think inflation is going to remain stubbornly high, but that is also a reason why one should wait for better CD rates.

For instance, if inflation doesn't go below 4% in the next year, Powell has said that would be intolerable since their target is 2%. Under that scenario it's likely he would have to go higher than a 5 to 5.25% Federal Funds terminal rate, their goal right now. If he does succeed in getting inflation down to 2% in the next year or two, then CDs would be the better alternative. Even if he raises the target inflation goal to 3%, you are better off with CDs over the next 5 years.

CDsuckers | Dec 30, 2022 | 70 posts since 2022

Well, back in 2019 CD rates were yielding 1% over the inflation rate.
For the first time that I can remember, CD yields turned negative in 2021 and 2022.
Even back in 1980 you could get a crummy 3 month CD that had a higher yield than inflation.
Thanks to ZIRP and QE, that didn't happen this time around.
And, I expect it will never happen again in any future inflationary event.

The whole point of TIPS is to provide protection from that sort of unexpected inflation.
Right now, TIPS guarantee at least 1.5% over future inflation as measured by the CPI-U.
That's the best yield on TIPS since before the 2008 crash.
So, I'm allocating more IRA funds towards TIPS from 2027 thru 2032.
I'm betting that there will be net inflation over terms that far out.
I'm willing to give-up possible extra yield from CD's for the certainty of principal protection.

Everything before 2027 is still going into CD's.
That's mostly because TIPS maturing before 2027 have good yields but cost way over par.
So, there is a definite deflationary risk purchasing expensive short term TIPS.
I've actually had to suffer thru a multi-month stretch of negative yields a few times in the past.
So, this isn't something that is just a theoretical possibility.

Choice | Dec 29, 2022 | 937 posts since 2020

CDSuckers…Could you expand on your “hole in…IRA RMD ladder.” One can take their RMD out of most if not all IRA CDs whatever the term…thus what is a ladder for RMD? Thanks

CDsuckers | Dec 29, 2022 | 70 posts since 2022

When the TIPS yields went negative in 2020 and 2021, I stopped buying them.
Since the CD yields were also paltry, I stopped buying them as well.
Normally, I just purchase the 5 year terms for both the CD's and TIPS.
So, this left nothing maturing in 2025 and 2026.
And, no CD's maturing after 2024.
I'm using the 2024 one to cover the RMD's for 2022,2023 and 2024.
I managed to snag a 3 year CD at close to 5% to cover the 2025 RMD.
However, by the time I had more IRA CD funds available, the 2026 CD's just disappeared.
I'm talking about one crummy day.
It looks like I'll have to settle for something in the low 4% range for 2026.
The one big downside to TIPS is that you can't take money out without cashing it in on the secondary market.
If you don't have any IRA CD's available that year, you're in trouble.
For 2025 and 2026, I'll have an IRA CD that will cover the RMD amount for those years.
I've also got three other years covered by maturing TIPS.
But, I've got 3 other years that I need to fill for the next 10 years.
At my age, I don't plan further than that.
The TIPS for those maturity dates that I need are way over par.
So, there'd be a possibility of losing money to deflation.
Under those circumstances, I'll grudgingly just pop for a CD.

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