Hedge CDs with long-term Treasurys?

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Browser
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Hedge CDs with long-term Treasurys?

Post by Browser »

I've got quite a bit of my portfolio presently tied up in short-term CDs (2-3 yrs) paying about 2.5% APY. If interest rate go up between now and the time they mature, I'll probably just roll them over. But what about if interest rates decline (possible deflationary scenario)? Does it make any sense to put some funds into long-term Treasurys in order to hedge against possible deflationary risk, and the risk of having CDs mature into a very low interest-rate environment? If interest rates increase, I'd be able to roll CDs over into higher-interest CDs which would help offset any marked-to-market capital losses in the long term Treasurys. Does this kind of strategy make sense? What ratio of long-term Treasurys to CDs might be most effective?
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Buddtholomew
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Re: Hedge CDs with long-term Treasurys?

Post by Buddtholomew »

Browser, what you are suggesting is otherwise known as a barbell approach to fixed income investing. I hold a combination of long-term treasuries and CD's to approximate a 5.6 year duration.
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jdb
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Re: Hedge CDs with long-term Treasurys?

Post by jdb »

In my taxable account hold Vanguard Long Term Tax Exempt and Vanguard Limited Term Tax Exempt. Same idea.
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JoMoney
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Re: Hedge CDs with long-term Treasurys?

Post by JoMoney »

Depending on how much you're planning on buying, I would think EE Savings Bonds would look more appealing for an individual U.S. investors at today's rates. The fact that the EE Savings Bonds are guaranteed to double in 20 years means if you hold onto them for that length of time your effective rate could be something close to 3.5%... You can barely get 3% if you're willing to go out 30 years with current treasury rates.
Personally, I'm not looking to lock in any long-term money at those fixed nominal rates, but I don't think people who are should ignore it.
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Grt2bOutdoors
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Re: Hedge CDs with long-term Treasurys?

Post by Grt2bOutdoors »

JoMoney wrote:Depending on how much you're planning on buying, I would think EE Savings Bonds would look more appealing for an individual U.S. investors at today's rates. The fact that the EE Savings Bonds are guaranteed to double in 20 years means if you hold onto them for that length of time your effective rate could be something close to 3.5%... You can barely get 3% if you're willing to go out 30 years with current treasury rates.
Personally, I'm not looking to lock in any long-term money at those fixed nominal rates, but I don't think people who are should ignore it.
One doesn't need to hold it for 20 years, if they find a better investment alternative over the term they can liquidate the position, albeit they will have only earned 0.5% for the first 19.9 years, it's the 20 year mark where the zero coupon effectively doubles in value. So, if you can hold for the duration as part of an LMP portfolio, not a bad idea, but the penalty can be large if you hold for say 15 years, then need to cash out.
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JoMoney
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Re: Hedge CDs with long-term Treasurys?

Post by JoMoney »

Grt2bOutdoors wrote:
JoMoney wrote:Depending on how much you're planning on buying, I would think EE Savings Bonds would look more appealing for an individual U.S. investors at today's rates. The fact that the EE Savings Bonds are guaranteed to double in 20 years means if you hold onto them for that length of time your effective rate could be something close to 3.5%... You can barely get 3% if you're willing to go out 30 years with current treasury rates.
Personally, I'm not looking to lock in any long-term money at those fixed nominal rates, but I don't think people who are should ignore it.
One doesn't need to hold it for 20 years, if they find a better investment alternative over the term they can liquidate the position, albeit they will have only earned 0.5% for the first 19.9 years, it's the 20 year mark where the zero coupon effectively doubles in value. So, if you can hold for the duration as part of an LMP portfolio, not a bad idea, but the penalty can be large if you hold for say 15 years, then need to cash out.
True, but that ability to cash out early with no loss in nominal value, and (potentially) buy higher rate securities might also be a feature. If interest rates rise and one needs to sell their 20-30 year treasury early on, the market price might apply a steep "penalty" as well.
... no free lunches i suppose, but something to think about...
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Angst
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Re: Hedge CDs with long-term Treasurys?

Post by Angst »

Grt2bOutdoors wrote:
JoMoney wrote:Depending on how much you're planning on buying, I would think EE Savings Bonds would look more appealing for an individual U.S. investors at today's rates. The fact that the EE Savings Bonds are guaranteed to double in 20 years means if you hold onto them for that length of time your effective rate could be something close to 3.5%... You can barely get 3% if you're willing to go out 30 years with current treasury rates.
Personally, I'm not looking to lock in any long-term money at those fixed nominal rates, but I don't think people who are should ignore it.
One doesn't need to hold it for 20 years, if they find a better investment alternative over the term they can liquidate the position, albeit they will have only earned 0.5% for the first 19.9 years, it's the 20 year mark where the zero coupon effectively doubles in value. So, if you can hold for the duration as part of an LMP portfolio, not a bad idea, but the penalty can be large if you hold for say 15 years, then need to cash out.
Yes, the penalty is large indeed! A 15 year-old Series EE Savings bond has 5 more years to nearly double in value, giving it an effective yield to maturity well over 13%. I'd want to think twice about cashing that in. :)
john94549
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Re: Hedge CDs with long-term Treasurys?

Post by john94549 »

OP: would not a 5-yr ladder of 5-yr CDs accomplish? Maybe pick up a few tasty "outliers" (those 3%+ brokered 10-yr CDs as they pop up, from time-to-time)? Before you take the plunge, I'd suggest you run through various scenarios. After all, the 30-yr Treasury does not compare favorably with those 10-yr CD "specials".
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Bustoff
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Re: Hedge CDs with long-term Treasurys?

Post by Bustoff »

JoMoney wrote:Depending on how much you're planning on buying, I would think EE Savings Bonds would look more appealing for an individual U.S. investors at today's rates. The fact that the EE Savings Bonds are guaranteed to double in 20 years means if you hold onto them for that length of time your effective rate could be something close to 3.5%... You can barely get 3% if you're willing to go out 30 years with current treasury rates.
Personally, I'm not looking to lock in any long-term money at those fixed nominal rates, but I don't think people who are should ignore it.
But is income the OP's concern?
If hedging the possibility of deflation is the wager, why lock yourself in for 20 years. If the wrong card hits the board, you can go from a great hand to one that can't win.
IMHO, if you're going to speculate, why not at least leave yourself some flexibility by using an ETF.
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