Anyone know when CD rates will increase?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Smartguy2351
Posts: 55
Joined: Sat Jan 17, 2015 1:54 pm

Anyone know when CD rates will increase?

Post by Smartguy2351 » Wed Jan 28, 2015 1:46 am

Does anyone know when CD rates will increase? If not, is there anyway to make a reliable estimate? 2.25% is the highest I see at the moment for bank CDs.

SteveKL
Posts: 498
Joined: Mon Sep 03, 2012 8:13 pm

Re: Anyone know when CD rates will increase?

Post by SteveKL » Wed Jan 28, 2015 1:56 am

2015 Interest Rate Projections: Here's how rates will affect your money next year

http://www.post-gazette.com/business/mo ... 1412150011

IPer
Posts: 1639
Joined: Sun Jul 28, 2013 8:51 pm

Re: Anyone know when CD rates will increase?

Post by IPer » Wed Jan 28, 2015 2:01 am

I am sorry I didn't understand the question, are you asking for a reading from my crystal ball?

http://mybigcrystalballcantellyouanythi ... fatfee.org :moneybag

:mrgreen:

Honestly, I just saw you are new to this forum, anyone who says they know the answer to your
question should be avoided.
Read the Wiki Wiki !

Smartguy2351
Posts: 55
Joined: Sat Jan 17, 2015 1:54 pm

Re: Anyone know when CD rates will increase?

Post by Smartguy2351 » Wed Jan 28, 2015 2:21 am

SteveKL wrote:2015 Interest Rate Projections: Here's how rates will affect your money next year

http://www.post-gazette.com/business/mo ... 1412150011
Thanks. I'll check out that article soon.

Smartguy2351
Posts: 55
Joined: Sat Jan 17, 2015 1:54 pm

Re: Anyone know when CD rates will increase?

Post by Smartguy2351 » Wed Jan 28, 2015 2:22 am

IPer wrote:I am sorry I didn't understand the question, are you asking for a reading from my crystal ball?

http://mybigcrystalballcantellyouanythi ... fatfee.org :moneybag

:mrgreen:

Honestly, I just saw you are new to this forum, anyone who says they know the answer to your
question should be avoided.
I figured someone would give your answer. That's why I also stated "If not, is there anyway to make a reliable estimate?"

IPer
Posts: 1639
Joined: Sun Jul 28, 2013 8:51 pm

Re: Anyone know when CD rates will increase?

Post by IPer » Wed Jan 28, 2015 2:44 am

Smartguy2351 wrote:
IPer wrote:I am sorry I didn't understand the question, are you asking for a reading from my crystal ball?

http://mybigcrystalballcantellyouanythi ... fatfee.org :moneybag

:mrgreen:

Honestly, I just saw you are new to this forum, anyone who says they know the answer to your
question should be avoided.
I figured someone would give your answer. That's why I also stated "If not, is there anyway to make a reliable estimate?"
How reliable?!!! :oops: 8-)
Read the Wiki Wiki !

lazyday
Posts: 3297
Joined: Wed Mar 14, 2007 10:27 pm

Re: Anyone know when CD rates will increase?

Post by lazyday » Wed Jan 28, 2015 4:18 am

You can use market prices to predict lots of things, like presidential elections, oil prices, or interest rates.

For example, the futures market predicts a less than 2% chance of a fed funds rate of 1.5% or better in 1 year from now.
http://www.cmegroup.com/trading/interes ... funds.html
These predictions have been really off lately. I haven't seen an analysis of how accurate they've been over time.

You can also look at predictions from people. I'm not sure how useful this is, but the "Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents" includes a table "Appropriate pace of policy firming: Midpoint of target range or target level for the federal funds rate"
http://www.federalreserve.gov/monetaryp ... 140917.pdf

So, how do we predict CD rates? I don't know, what rate do they tend to match? 10 year Treasury? Mortgage rates? Some combination of rates? If we can find a decent model relating CD rates to other rates, then we might try to find ways to predict those rates.

If there was a practical way to do all this, that had useful predictive value, we probably would have already heard about it. Or who knows, maybe Bogleheads can collaborate to create a prediction system that will come to be used by millions of investors.

Anyway OP, my advice is to assume that noone knows. I think rates are terrible today, but am buying CDs anyway because I've no idea when they will be better. I am trying to avoid interest rate risk (such as in long term bonds) but even that might be a bad idea.

Wayson
Posts: 76
Joined: Thu Jul 10, 2014 11:33 am

Re: Anyone know when CD rates will increase?

Post by Wayson » Wed Jan 28, 2015 4:27 am

Smartguy2351 wrote:Does anyone know when CD rates will increase? If not, is there anyway to make a reliable estimate? 2.25% is the highest I see at the moment for bank CDs.
*shakes Magic 8 Ball*

Survey says... "Cannot predict now."

stan1
Posts: 5904
Joined: Mon Oct 08, 2007 4:35 pm

Re: Anyone know when CD rates will increase?

Post by stan1 » Wed Jan 28, 2015 5:36 am

1 year into a 5 year, 3% CD for my mom. I'm hoping very hard she can get at least 3% on another 5 year CD when this one comes due in 2018. I think there's a fair chance I'll be disappointed.

User avatar
nisiprius
Advisory Board
Posts: 36663
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Anyone know when CD rates will increase?

Post by nisiprius » Wed Jan 28, 2015 7:48 am

Smartguy2351 wrote:Does anyone know when CD rates will increase? If not, is there anyway to make a reliable estimate? 2.25% is the highest I see at the moment for bank CDs.
Repeat after me:

Nobody even knows IF CD rates will increase.

Nobody even knows IF CD rates will increase.

Nobody even knows IF CD rates will increase.

There is no way to make a reliable estimate. Interest rate "predictions" are very unreliable. Anything you read is just somebody's wild guess. Last year, in April, Bloomberg asked 67 economists what they expected the 10-year Treasury rate to do over the next six months. Every one of them, every single one, all 67 of them, said the yield would rise, the only disagreement was by how much. The yield actually fell, and it is lower now than it was then. So much for interest rate predictions. Ignore them.

Given that bank CD rates are well above Treasury rates, if I wanted to put my money someplace safe for X years and a bank CD made sense in general, I'd go ahead and do it. Rates could get better but you can't always guess right, and they could just as well fall. In fact I don't completely understand why they haven't, since Treasury rates have.

I can get over 2% from a bank for a 5-year CD and I can only get 1.34% from the Treasury? (Shrug) 2% sounds like it must be a decent deal, why wait for a better thing and possibly miss out on what seems like an OK thing?

http://www.treasury.gov/resource-center ... data=yield

Code: Select all

Date		1 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
01/27/15	0.02	0.02	0.08	0.17	0.54	0.87	1.34	1.62	1.83	2.15	2.40
Last edited by nisiprius on Wed Jan 28, 2015 7:59 am, edited 6 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Call_Me_Op
Posts: 7029
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Anyone know when CD rates will increase?

Post by Call_Me_Op » Wed Jan 28, 2015 7:49 am

Smartguy2351 wrote:Does anyone know when CD rates will increase?
How could anyone possibly know that?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
HueyLD
Posts: 6069
Joined: Mon Jan 14, 2008 10:30 am

Re: Anyone know when CD rates will increase?

Post by HueyLD » Wed Jan 28, 2015 8:11 am

...........
Last edited by HueyLD on Sat Feb 07, 2015 12:57 pm, edited 1 time in total.

User avatar
Peculiar_Investor
Posts: 1110
Joined: Thu Oct 20, 2011 12:23 am
Location: Calgary, AB
Contact:

Re: Anyone know when CD rates will increase?

Post by Peculiar_Investor » Wed Jan 28, 2015 8:46 am

Are CD rates part of the annual Bogleheads prediction content? If so, there is some past performance data available, but of course it won't predict future values.
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams

steve r
Posts: 504
Joined: Mon Feb 13, 2012 8:34 pm

Re: Anyone know when CD rates will increase?

Post by steve r » Wed Jan 28, 2015 8:58 am

Nobel Prize winning economist Thomas Sargent has this prediction on interest rates (short video). Enjoy.


https://www.youtube.com/watch?v=CF4MD5imt2U
Maximize Diversification - Minimize Costs - Avoid Lotteries

choices
Posts: 84
Joined: Sun Dec 21, 2014 8:33 pm

Re: Anyone know when CD rates will increase?

Post by choices » Wed Jan 28, 2015 11:01 am

I've put a chunk of our EF into a CD ladder 2,3,4 and 5 years. Just lettin it rock n roll. We make a bit more than in a savings/share account and it is readily accessible. It is not a large part of our NW.

User avatar
greg24
Posts: 3230
Joined: Tue Feb 20, 2007 10:34 am

Re: Anyone know when CD rates will increase?

Post by greg24 » Wed Jan 28, 2015 11:04 am

Why waste time attempting to reliably forecast CD rates? You should focus on reliably forecasting the equity markets.

dgdevil
Posts: 938
Joined: Sun Feb 20, 2011 1:42 pm

Re: Anyone know when CD rates will increase?

Post by dgdevil » Wed Jan 28, 2015 11:10 am

It's a valid question, and the silly responses were inevitable. I have some Raise Your Rate CDs at Ally, and the one time I exercised the option I was too early by a few days and missed out on a few extra shekels. So when I look at my account now (on the horrible new web site), and see that I can raise my newish 2-year CD to 1.29% from 1.24%, I wonder the same thing as the OP. This is all about timing the market, and I'm probably screwed either way.

Smartguy2351
Posts: 55
Joined: Sat Jan 17, 2015 1:54 pm

Re: Anyone know when CD rates will increase?

Post by Smartguy2351 » Wed Jan 28, 2015 12:38 pm

lazyday wrote:You can use market prices to predict lots of things, like presidential elections, oil prices, or interest rates.

For example, the futures market predicts a less than 2% chance of a fed funds rate of 1.5% or better in 1 year from now.
http://www.cmegroup.com/trading/interes ... funds.html
These predictions have been really off lately. I haven't seen an analysis of how accurate they've been over time.

You can also look at predictions from people. I'm not sure how useful this is, but the "Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents" includes a table "Appropriate pace of policy firming: Midpoint of target range or target level for the federal funds rate"
http://www.federalreserve.gov/monetaryp ... 140917.pdf

So, how do we predict CD rates? I don't know, what rate do they tend to match? 10 year Treasury? Mortgage rates? Some combination of rates? If we can find a decent model relating CD rates to other rates, then we might try to find ways to predict those rates.

If there was a practical way to do all this, that had useful predictive value, we probably would have already heard about it. Or who knows, maybe Bogleheads can collaborate to create a prediction system that will come to be used by millions of investors.

Anyway OP, my advice is to assume that noone knows. I think rates are terrible today, but am buying CDs anyway because I've no idea when they will be better. I am trying to avoid interest rate risk (such as in long term bonds) but even that might be a bad idea.
Ok great. Thanks for your help. I'll check out those links soon. I'm just trying to learn as much as I can so that I can make the best possible financial decisions.
stan1 wrote:1 year into a 5 year, 3% CD for my mom. I'm hoping very hard she can get at least 3% on another 5 year CD when this one comes due in 2018. I think there's a fair chance I'll be disappointed.
Wow. Where did you find a 3% CD!? The highest I found was 2.25% with banks like Synchrony and Barclay.
nisiprius wrote:
Smartguy2351 wrote:Does anyone know when CD rates will increase? If not, is there anyway to make a reliable estimate? 2.25% is the highest I see at the moment for bank CDs.
Repeat after me:

Nobody even knows IF CD rates will increase.

Nobody even knows IF CD rates will increase.

Nobody even knows IF CD rates will increase.

There is no way to make a reliable estimate. Interest rate "predictions" are very unreliable. Anything you read is just somebody's wild guess. Last year, in April, Bloomberg asked 67 economists what they expected the 10-year Treasury rate to do over the next six months. Every one of them, every single one, all 67 of them, said the yield would rise, the only disagreement was by how much. The yield actually fell, and it is lower now than it was then. So much for interest rate predictions. Ignore them.

Given that bank CD rates are well above Treasury rates, if I wanted to put my money someplace safe for X years and a bank CD made sense in general, I'd go ahead and do it. Rates could get better but you can't always guess right, and they could just as well fall. In fact I don't completely understand why they haven't, since Treasury rates have.

I can get over 2% from a bank for a 5-year CD and I can only get 1.34% from the Treasury? (Shrug) 2% sounds like it must be a decent deal, why wait for a better thing and possibly miss out on what seems like an OK thing?

http://www.treasury.gov/resource-center ... data=yield

Code: Select all

Date		1 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
01/27/15	0.02	0.02	0.08	0.17	0.54	0.87	1.34	1.62	1.83	2.15	2.40
Thanks for your great explanation. It must be very hard to make an accurate prediction on interest rates if 67 economists couldn't get it right. I agree with your statement about going with CDs since their rates are currently much higher than treasuries.
dgdevil wrote:It's a valid question, and the silly responses were inevitable. I have some Raise Your Rate CDs at Ally, and the one time I exercised the option I was too early by a few days and missed out on a few extra shekels. So when I look at my account now (on the horrible new web site), and see that I can raise my newish 2-year CD to 1.29% from 1.24%, I wonder the same thing as the OP. This is all about timing the market, and I'm probably screwed either way.
I agree that the new Ally website is horrible. I actually having a savings account with Ally. I think I'm gonna look elsewhere for my CDs though because I see that Synchrony and Barclay offer 2.25% on 5 year CDs and the early withdrawal penalty is 180 days and not 360 days like many of the other ones out there.

yosef
Posts: 337
Joined: Tue May 24, 2011 2:10 pm

Re: Anyone know when CD rates will increase?

Post by yosef » Wed Jan 28, 2015 2:44 pm

Not to derail the thread too much, but I agree that the new Ally site looks like it was designed for the visually impaired.

toto238
Posts: 1880
Joined: Wed Feb 05, 2014 2:39 am

Re: Anyone know when CD rates will increase?

Post by toto238 » Wed Jan 28, 2015 3:16 pm

Smartguy2351 wrote:Does anyone know when CD rates will increase?
There's thousands of people who "know" when CD rates will increase, and they all have a different answer. And by pure dumb luck, a small handful of them will be correct.

That being said, who says CD rates WILL increase? They may not for the forseeable future. It is entirely possible that you may never see a better rate than 2.25% again in your entire life.

randomguy
Posts: 6295
Joined: Wed Sep 17, 2014 9:00 am

Re: Anyone know when CD rates will increase?

Post by randomguy » Wed Jan 28, 2015 3:35 pm

nisiprius wrote:
Smartguy2351 wrote:Does anyone know when CD rates will increase? If not, is there anyway to make a reliable estimate? 2.25% is the highest I see at the moment for bank CDs.
Repeat after me:

Nobody even knows IF CD rates will increase.

Nobody even knows IF CD rates will increase.

Nobody even knows IF CD rates will increase.
I know CD rates will increase. Just don't ask me if it is in 6 months or 50 years. Last time we had low interest rates like this it lasted for over 20 years (treasuries sub 3% 1935-1956). Thats a long time to wait for a rate increase.

User avatar
Kevin M
Posts: 10103
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Anyone know when CD rates will increase?

Post by Kevin M » Wed Jan 28, 2015 3:57 pm

With the recent decline in 5-year Treasury rates, I'd be more concerned about CD rates falling in the short term. People, including experts, are notoriously bad at predicting future interest rates. The shape of the yield curve sometimes is used to predict future interest rates, but it also is notoriously bad at it. I try not to make decisions based on interest-rate predictions, but based on the trade-off between risk and expected return given various future interest-rate scenarios.

If serious about using CDs for part of fixed-income portion of portfolio, I would go for a 2.25% CD with an early withdrawal penalty of six months of interest, and not hesitate too much longer. One of the beauties of a CD like this is that if interest rates increase much, it doesn't cost you much to do an early withdrawal and reinvest at the higher rate. At the current 5-year Treasury rate of 1.34%, a 5-year CD at 2.25% is in the ballpark of the average CD to Treasury premium of about 1% that I've received in buying CDs over the last four years or so; well below the highest premium, but well above the lowest.

I wouldn't mess around with a raise-your-rate CD; the rates are too much lower to make it worth it. I bought a couple a few years ago, but don't think I'd do it again unless rates were very close to standard CD rates.

Just this week I had my niece buy an Ally 5-year 2% CD in her IRA there. Not the best rate, but for her, the convenience of not having to open another IRA at another bank or CU is worth the slightly lower rate. I have a bunch of Ally CDs from when rates were higher and the EWP was only two months of interest. I may roll some maturing IRA CDs into new CDs there as long as rates are competitive, even if not the highest, again, simply for the convenience factor. But for a new account, I would go with Synchrony or some other bank/CU offering the higher rate.

Some of us were hoping for another great PenFed CD deal over the holidays, like the 5-year 3% CD they offered during the 2013/2014 holiday season. Didn't happen, and there was a 2.4% 5-year deal on the table elsewhere shortly before that.

If in doubt, one alternative is to put half into a CD now, and hold off on putting the other half in till later in the year. It may not be the best choice financially, but it's better than too much analysis paralysis. At least it will help you learn the ropes of purchasing direct CDs.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

trueblueky
Posts: 1346
Joined: Tue May 27, 2014 3:50 pm

Re: Anyone know when CD rates will increase?

Post by trueblueky » Wed Jan 28, 2015 4:16 pm

Our local credit union will offer NCUA-insured 5-year CDs in February at 3.04% APY (figured over the five years). The trick is the first year the interest rate is 1%; the second, it's 2%, and so forth. The early withdrawal penalty changes over time and is designed to be worse the sooner you break it. I'm thinking of getting a few with the understanding this is money I won't need for 5 years.

john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: Anyone know when CD rates will increase?

Post by john94549 » Wed Jan 28, 2015 4:18 pm

I've followed CD rates for some time, and I suspect there might be some disconnect between CD rates and interest rates overall. For example, from time-to-time, "hot deals" on CDs appear with no rational relation to bond rates, the prime rate, or anything else. An institution might be entering a lending market (say, sub-prime used car loans), see an opportunity, and seek to raise millions of dollars quickly and opportunistically. It might do so by offering "above-market" CDs to retail buyers. Then, when its funding target is met, "poof" the CD goes away.

Stated another way, best not to ever try to predict CD rates, as they may vary based on factors unknown, and unknowable. Just check for the best rates, take advantage (mindful of FDIC- and NCUA-insurance), and worry not.

dgdevil
Posts: 938
Joined: Sun Feb 20, 2011 1:42 pm

Re: Anyone know when CD rates will increase?

Post by dgdevil » Wed Jan 28, 2015 4:25 pm

Kevin M wrote: Kevin
Great read, thank you!

User avatar
Kevin M
Posts: 10103
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Anyone know when CD rates will increase?

Post by Kevin M » Wed Jan 28, 2015 4:42 pm

john94549 wrote:I've followed CD rates for some time, and I suspect there might be some disconnect between CD rates and interest rates overall.
I posted this in another thread not too long ago. This is the actual history of APYs on CDs I've purchased and Treasury yields for same maturities. Also included is a line representing the CD premium over Treasury yield, which makes the chart a little harder to read, but just look carefully at each line and the legend and it should make sense.

Image

If you look just at the blue and red lines, you do see some tracking of rates, but the orange CD premium line shows some of the disconnects John is talking about.

The orange CD premium line is where the average premium of about 1% comes from (actually closer to 1.1%), but you can see that it's varied quite a bit. The minimum premium was 0.24% and the maximum was 1.65%.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

IPer
Posts: 1639
Joined: Sun Jul 28, 2013 8:51 pm

Re: Anyone know when CD rates will increase?

Post by IPer » Wed Jan 28, 2015 6:00 pm

Here is a mostly unreliable estimate, perhaps if you take the opposite of this it makes it reliable?! http://finance.yahoo.com/news/why-fed-r ... 18979.html
I doubt it!
Read the Wiki Wiki !

Rob Bertram
Posts: 807
Joined: Mon May 05, 2014 12:15 pm

Re: Anyone know when CD rates will increase?

Post by Rob Bertram » Wed Jan 28, 2015 6:03 pm

For example, the futures market predicts a less than 2% chance of a fed funds rate of 1.5% or better in 1 year from now.
http://www.cmegroup.com/trading/interes ... funds.html
These predictions have been really off lately. I haven't seen an analysis of how accurate they've been over time.
I can't take credit for this graphic, but it definitely looks like the futures market is bad at predicting the fed funds rate as well.
Image

lazyday
Posts: 3297
Joined: Wed Mar 14, 2007 10:27 pm

Re: Anyone know when CD rates will increase?

Post by lazyday » Wed Jan 28, 2015 6:19 pm

Such a creepy looking hairy chart.

Contract trading began in 1988, so that chart shows half of the history. Yeah it doesn't look promising.

http://research.stlouisfed.org/publicat ... 9711dt.pdf
The Chicago Board of Trade (CBOT)
began offering federal funds futures contracts
in October 1988

User avatar
William Million
Posts: 547
Joined: Wed May 05, 2010 4:41 am
Location: A Deep Mountain

Re: Anyone know when CD rates will increase?

Post by William Million » Wed Jan 28, 2015 6:51 pm

Don't sweat it. Put any fixed income funds into 2.25 CDs with maximum penalty of 6 months. If rates fall, you win. If rates rise, you break the CD and also win. And the money is FDIC insured. All in all, not a bad deal.

Ninegrams
Posts: 557
Joined: Sun Aug 17, 2014 6:12 pm

Re: Anyone know when CD rates will increase?

Post by Ninegrams » Wed Jan 28, 2015 11:18 pm

I stopped worrying about this question a long time ago once I setup a 5 yr CD ladder. Now I just buy on schedule as they roll over every January ( just bought the 2.25% in fact ).

john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: Anyone know when CD rates will increase?

Post by john94549 » Wed Jan 28, 2015 11:28 pm

Ninegrams wrote:I stopped worrying about this question a long time ago once I setup a 5 yr CD ladder. Now I just buy on schedule as they roll over every January ( just bought the 2.25% in fact ).
Your ladder, as they say, is optimal. I've long advocated the 5-yr CD as the preferred product for a CD ladder. Most financial institutions (banks and credit unions) offer 5-yr CDs; accordingly, there is more competition on rates, and it is easier to "roll" a maturing CD. For those who like to dabble in "hot deals", it is possible to find CDs at other terms (e.g., seven and ten years) with better rates, but it is best to hold same "outside" the core ladder, as icing on the cake, as it were. One's core ladder should be easy to fill, easy to roll.

I've noted some here who have begun to construct ten-year ladders of ten-year brokered CDs, and that is certainly worth exploration. Ten-year CDs through brokerages have become somewhat more available of late. The key always is "easy to fill, easy to roll".

Smartguy2351
Posts: 55
Joined: Sat Jan 17, 2015 1:54 pm

Re: Anyone know when CD rates will increase?

Post by Smartguy2351 » Thu Jan 29, 2015 2:18 am

I really appreciate all the different perspectives I'm getting on this topic. I'm so happy I registered with this forum. Thanks everyone.
Kevin M wrote:With the recent decline in 5-year Treasury rates, I'd be more concerned about CD rates falling in the short term. People, including experts, are notoriously bad at predicting future interest rates. The shape of the yield curve sometimes is used to predict future interest rates, but it also is notoriously bad at it. I try not to make decisions based on interest-rate predictions, but based on the trade-off between risk and expected return given various future interest-rate scenarios.

If serious about using CDs for part of fixed-income portion of portfolio, I would go for a 2.25% CD with an early withdrawal penalty of six months of interest, and not hesitate too much longer. One of the beauties of a CD like this is that if interest rates increase much, it doesn't cost you much to do an early withdrawal and reinvest at the higher rate. At the current 5-year Treasury rate of 1.34%, a 5-year CD at 2.25% is in the ballpark of the average CD to Treasury premium of about 1% that I've received in buying CDs over the last four years or so; well below the highest premium, but well above the lowest.

I wouldn't mess around with a raise-your-rate CD; the rates are too much lower to make it worth it. I bought a couple a few years ago, but don't think I'd do it again unless rates were very close to standard CD rates.

Just this week I had my niece buy an Ally 5-year 2% CD in her IRA there. Not the best rate, but for her, the convenience of not having to open another IRA at another bank or CU is worth the slightly lower rate. I have a bunch of Ally CDs from when rates were higher and the EWP was only two months of interest. I may roll some maturing IRA CDs into new CDs there as long as rates are competitive, even if not the highest, again, simply for the convenience factor. But for a new account, I would go with Synchrony or some other bank/CU offering the higher rate.

Some of us were hoping for another great PenFed CD deal over the holidays, like the 5-year 3% CD they offered during the 2013/2014 holiday season. Didn't happen, and there was a 2.4% 5-year deal on the table elsewhere shortly before that.

If in doubt, one alternative is to put half into a CD now, and hold off on putting the other half in till later in the year. It may not be the best choice financially, but it's better than too much analysis paralysis. At least it will help you learn the ropes of purchasing direct CDs.

Kevin
Yes a EWP of 6 months interest is bearable. That's one of the main reasons I'm considering a 5 year 2.25% CD. I agree with your last statements also. Many websites I read say that the rates on CDs are tied to the interest rates set by the Federal Reserve and that the Fed is currently keeping rates low to help boost the economy. Do you agree that CD rates will most likely increase if the Fed increases their rates?

Also, what do you guys think about putting corporate bonds in my portfolio instead of CDs? I see corporates with Fitch Ratings A-AAA that have coupons 7%+. I know they aren't FDIC insured like CDs are, so the risk is a lot higher, but how risky is a A-AAA rated company really? For example I see an A-rated Pepsico bond with a 7.9% coupon maturing in 3 years. These returns are looking so much more enticing than a 2.25% CD. Maybe I should put a portion of my money into corporates and a portion into CDs?

User avatar
obgyn65
Posts: 770
Joined: Sun May 06, 2012 9:11 am

Re: Anyone know when CD rates will increase?

Post by obgyn65 » Thu Jan 29, 2015 6:27 am

To the OP - no one knows. I keep buying 10-year CDs with the expectation that CD rates won't increase again in my lifetime.
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell

lazyday
Posts: 3297
Joined: Wed Mar 14, 2007 10:27 pm

Re: Anyone know when CD rates will increase?

Post by lazyday » Thu Jan 29, 2015 7:35 am

For example I see an A-rated Pepsico bond with a 7.9% coupon maturing in 3 years.
Check the YTM Yield To Maturity. You can find Treasury bonds with very high coupon yield and no credit risk, but you have to pay a premium.

Grt2bOutdoors
Posts: 19173
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Anyone know when CD rates will increase?

Post by Grt2bOutdoors » Thu Jan 29, 2015 8:57 am

Increase? I expect them to fall over the next 6 months.

My f-I-l was recently solicited from Wells Fargo (no less) to buy a gimmick CD that is registered as a 5 year callable CD. You get 1.75% for the first 3 years, then 2.25% in year 4 and 4% in year 5. Sounds great, right? Only the catch in small print is - they can call the CD at the end of year 3! And to top it off, they "Wells Fargo Advisers" collect a .45% placement fee so the real rate is really 2.2% for the first 3 years, but because of the placement fee you end up with a heck of a lot less. These are the gimmicks the banks are resorting to these days.

The other gimmick was an indexed fixed annuity - based on the S&P 500. If the market rises above 5.25%, you get 4.25% but if the market was to fall, you are guaranteed.....Wait for it........1% per year for the next 7 years. So, you tie up your money for 7 years and are guaranteed a rate of 1% or if the market rises above 4.25% you get the 4.25% rate. I can see people who would fall for this......and I don't like how the shills at the bank are selling this to their customers as if it were a good deal. Sure, it's a good deal - for Wells Fargo and the fellow selling it, not for the customer though.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Smartguy2351
Posts: 55
Joined: Sat Jan 17, 2015 1:54 pm

Re: Anyone know when CD rates will increase?

Post by Smartguy2351 » Thu Jan 29, 2015 11:40 am

lazyday wrote:
For example I see an A-rated Pepsico bond with a 7.9% coupon maturing in 3 years.
Check the YTM Yield To Maturity. You can find Treasury bonds with very high coupon yield and no credit risk, but you have to pay a premium.
I don't mind paying a premium for a bond as long as it isn't extremely expensive. The returns will still end up way higher than 2.25% CDs.

Smartguy2351
Posts: 55
Joined: Sat Jan 17, 2015 1:54 pm

Re: Anyone know when CD rates will increase?

Post by Smartguy2351 » Thu Jan 29, 2015 11:41 am

Grt2bOutdoors wrote:Increase? I expect them to fall over the next 6 months.
A lot of people have been saying the same thing as you. Wow. I guess I have to decide where to invest the fixed income portion of my portfolio asap.

Leesbro63
Posts: 5468
Joined: Mon Nov 08, 2010 4:36 pm

Re: Anyone know when CD rates will increase?

Post by Leesbro63 » Thu Jan 29, 2015 11:48 am

If anyone really knew when CD rates will increase...or when anything else will happen that's uncertain...why would they tell us?

User avatar
Abe
Posts: 1787
Joined: Fri Sep 18, 2009 5:24 pm
Location: Earth in the Milky Way Galaxy

Re: Anyone know when CD rates will increase?

Post by Abe » Thu Jan 29, 2015 12:32 pm

There is some speculation that the Fed will start raising rates sometime in 2015. But that is just speculation. Even if they do start raising rates, it will probably be painfully slow. As others have said, nobody knows.
I made the mistake of thinking rates would not stay down very long. I figure I am about $700k poorer because of that. :oops:
Slow and steady wins the race.

Leesbro63
Posts: 5468
Joined: Mon Nov 08, 2010 4:36 pm

Re: Anyone know when CD rates will increase?

Post by Leesbro63 » Thu Jan 29, 2015 12:40 pm

Abe wrote:There is some speculation that the Fed will start raising rates sometime in 2015. But that is just speculation. Even if they do start raising rates, it will probably be painfully slow. As others have said, nobody knows.
I made the mistake of thinking rates would not stay down very long. I figure I am about $700k poorer because of that. :oops:
Many of us made the same mistake. As did Dr. Bernstein. But it might not have been a mistake...just something that didn't work out. The mistake might be taking the big risk that rates rise sharply and our safe money unintentionally becomes our risk money.

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Anyone know when CD rates will increase?

Post by richard » Thu Jan 29, 2015 12:43 pm

Abe wrote:There is some speculation that the Fed will start raising rates sometime in 2015. But that is just speculation. Even if they do start raising rates, it will probably be painfully slow. As others have said, nobody knows.
I made the mistake of thinking rates would not stay down very long. I figure I am about $700k poorer because of that. :oops:
Even if the Fed starts raising rates sometime in 2015, the rates they will raise will be very short maturities. There's no assurance longer rates will increase and a reasonable chance longer rates will decrease.

The Wizard
Posts: 12277
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Anyone know when CD rates will increase?

Post by The Wizard » Thu Jan 29, 2015 12:53 pm

Abe wrote:There is some speculation that the Fed will start raising rates sometime in 2015. But that is just speculation. Even if they do start raising rates, it will probably be painfully slow. As others have said, nobody knows.
I made the mistake of thinking rates would not stay down very long. I figure I am about $700k poorer because of that. :oops:
$700k is a lot of money.
Would you care to explain precisely how you lost that much due to interest rates?
Attempted new signature...

likashing
Posts: 149
Joined: Tue Mar 06, 2007 7:58 pm

Re: Anyone know when CD rates will increase?

Post by likashing » Thu Jan 29, 2015 1:33 pm

Is Synchrony the best now for the a 5-year IRA CD with 180 days penalty? It's 2.25% and it's too late to get the NASA FCU 4-year CD which ends Jan 31.

User avatar
Abe
Posts: 1787
Joined: Fri Sep 18, 2009 5:24 pm
Location: Earth in the Milky Way Galaxy

Re: Anyone know when CD rates will increase?

Post by Abe » Thu Jan 29, 2015 3:22 pm

The Wizard wrote:
Abe wrote:There is some speculation that the Fed will start raising rates sometime in 2015. But that is just speculation. Even if they do start raising rates, it will probably be painfully slow. As others have said, nobody knows.
I made the mistake of thinking rates would not stay down very long. I figure I am about $700k poorer because of that. :oops:
$700k is a lot of money.
Would you care to explain precisely how you lost that much due to interest rates?
Wizard: Sorry it took me so long to respond. When I said $700k that was an off-the-cuff estimate.
I figured I have roughly 2 million in short term investments. A big part of it is in Vanguard Money Mkt Fund paying .01% I think. I figured if I had been getting 5% on the 2 million that would be $100k per year for 7 years (my estimate of how long rates have been down) which comes to $700k. I guess it would be a little less than that because I have been getting some return on my money during that time.
Slow and steady wins the race.

User avatar
ogd
Posts: 4854
Joined: Thu Jun 14, 2012 11:43 pm

Re: Anyone know when CD rates will increase?

Post by ogd » Thu Jan 29, 2015 3:32 pm

Smartguy2351 wrote:
lazyday wrote:
For example I see an A-rated Pepsico bond with a 7.9% coupon maturing in 3 years.
Check the YTM Yield To Maturity. You can find Treasury bonds with very high coupon yield and no credit risk, but you have to pay a premium.
I don't mind paying a premium for a bond as long as it isn't extremely expensive. The returns will still end up way higher than 2.25% CDs.
No, it won't. Your Pepsico bond has a YtM of 1.695. Between the coupon and the loss of premium that will occur by maturity (the present $123 going back to $100), there's no way you will make more than 1.7% on this bond except for a very short while if rates decline. This is math, not market calls.

I'm sorry to say this, but you have a lot to learn before you go into trading bonds particularly corporate. Vague statements like "as long as it isn't extremely expensive" are simply not good enough. I wouldn't trust myself with this activity either, btw, except maybe in Treasuries, which is why I only use funds.

User avatar
ogd
Posts: 4854
Joined: Thu Jun 14, 2012 11:43 pm

Re: Anyone know when CD rates will increase?

Post by ogd » Thu Jan 29, 2015 3:35 pm

As for CD rates, my question would be when will rates decrease, as they are currently too disconnected from the bond market. I would say 2-3 months at most if the present trajectory of rates is not significantly reversed.

User avatar
Kevin M
Posts: 10103
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Anyone know when CD rates will increase?

Post by Kevin M » Thu Jan 29, 2015 4:09 pm

Smartguy2351 wrote:For example I see an A-rated Pepsico bond with a 7.9% coupon maturing in 3 years. These returns are looking so much more enticing than a 2.25% CD. Maybe I should put a portion of my money into corporates and a portion into CDs?
As has been explained, it's not the coupon rate but the yield to maturity that is a better measure of the average annualized interest you'll receive if you hold the bond to maturity.

Here's something very basic about bonds that you should understand. First, look at the Treasury yield curve: Daily Treasury Yield Curve Rates. Look at the term to maturity of interest, in this case, three years. The current yield on a 3-year Treasury is 0.81%. This is the rate that "the market" considers fair for the safest 3-year bond. Any 3-year bond offering a higher rate is correspondingly riskier; the bond market tends to be quite efficient at pricing bonds.

This provides an instant reality check that a 7.9% rate on a 3-year bond is not realistic, unless it's complete junk, and the market is expecting a default. Even the yield of about 1.7% quoted by ogd indicates that the market considers this bond a fair amount riskier than a 3-year Treasury. You always should ask, "what do I know that the market doesn't know?".

The magic about CDs is that they are not a typical, marketable fixed-income instrument, and the federal insurance that makes them close to risk free for smaller investors is limited, so large institutional investors cannot take advantage of them. So smaller investors do have something of a free lunch with retail deposit account products, like savings accounts and CDs. The federal insurance makes them just about as safe as a Treasury in terms of credit risk (although some will debate this), you often can find much higher rates than Treasuries (as now), and the early withdrawal option on a direct CD lowers your term risk (aka, interest-rate risk).

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
msi
Posts: 364
Joined: Sun Feb 17, 2008 11:15 pm

Re: Anyone know when CD rates will increase?

Post by msi » Thu Jan 29, 2015 4:36 pm

likashing wrote:Is Synchrony the best now for the a 5-year IRA CD with 180 days penalty? It's 2.25% and it's too late to get the NASA FCU 4-year CD which ends Jan 31.
Yeah, Barclays has the same deal. CIT is paying 2.32% on 5 year jumbos, but the EWP is 1 year's interest.

john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: Anyone know when CD rates will increase?

Post by john94549 » Thu Jan 29, 2015 7:36 pm

The disconnect and the "free lunch" noted by Kevin make shopping for CDs ever so much fun. I've always wondered how many sub-prime auto loans I've helped finance. I suspect lotsa cars out there today tooling around with my money, as it were. So long as I'm FDIC- or NCUA-insured, I say, "go for it!"

Irony is, the cars they're driving are probably much better than mine.

Post Reply