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CD at 2.70 APR - 1, 2 or 3 years?

Posted: Thu Jan 10, 2019 10:11 pm
by Bambuk
Capital One 360 currently offers pretty much the same rate (2.70% - 2.80) for 1 , 2 and 3 year CDs.
Assuming the FED will raise rates 1 more time in 2019 and then a recession starts in 2020 and the FED either start cutting the rates (lets say a year from now) and/or indicates the cuts are coming later in 2020.

So in early 2020 the rate will be same as right now but the anticipation will be for the rates to go lower.
Would that mean the CD rates will be lower?
I am afraid that if I go with 1 year CD then a year from now the rates might be lower if the prevailing expectation will be for the rates to go lower.
Of course, I might be wrong.
If the rates are close to current ones in yearly 2020, then I would rather invest in 1 year CD right now and see what happens then.
Or should I go with 2 year CD? 3 years (assuming the rates are going down).
TIA.

Re: CD at 2.70 APR - 1 year or 2 years?

Posted: Thu Jan 10, 2019 10:13 pm
by Skyccord
If you know a recession is coming if I were you I would just short everything and wait to cash in next year.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Thu Jan 10, 2019 10:20 pm
by Bambuk
I don't know. But this is best guess scenario.
And I don't short (market can stay irrational longer than you can stay solvent). And I have stocks in case there is no recession.
This is money that I might need in 3 years so I want to have them intact.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Thu Jan 10, 2019 11:18 pm
by phantom0308
It depends on the slope of interest rate changes in the next 3 years.

The reason interest rates are flat is due to reinvestment risk which is the risk that you won’t be able to get the same interest rate if you invest in a short duration bond.
I think the goal if you’re investing in individual CDs and timing the market is to buy when interest rates are at a local peak at a duration that will last until interest rates recover back to the current position. So if interest rates look like a bowl, you’re jumping from one lip to the other.

You should probably just use a bond fund or a CD ladder though. Since you know, you probably can’t time the market. :|

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Thu Jan 10, 2019 11:29 pm
by Kevin M
There is no right answer, because no one really knows what interest rates will be in the future. You are looking at the tradeoff between term risk and reinvestment risk.

I am more averse to term risk, so am tending to stay shorter term with new cash, given the very flat yield curves we're seeing. I am continuing to hold my intermediate-term bond funds and CDs for now, which hedges the reinvestment risk somewhat.

I'm also keeping my eyes open for deals. One credit union is offering a CD that pays 3% in year one, 3.5% in year two, and 4% in year three, and gives you the option to do a penalty-free withdrawal each time the rate increases. That is the best of all worlds! A 1-year rate that beats most of the competition, a guaranteed rate increase when yield curves seem to indicate expectations for continued low yields, and the option to get out early for free if rates increase more than expected. I happen to already be a member of this CU, and will be working on getting some money into one or more of these CDs starting tomorrow.

Also, 2.7% for a 3-year CD is a bit low. Brokered new-issue 2-year is at 2.85% callable, 2.75% non-callable, and 3-year is at 3.00% non-callable. That's still a pretty flat yield curve, but not nearly as flat as Treasuries--Treasury yield curve actually is inverted at certain intervals.

Even 8-to-9-month Treasuries are providing a taxable-equivalent yield for me of about 2.9%, but you don't get any more than that for extending maturity, even out to five years.

Kevin

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 10:03 am
by MikeG62
Kevin M wrote:
Thu Jan 10, 2019 11:29 pm

I'm also keeping my eyes open for deals. One credit union is offering a CD that pays 3% in year one, 3.5% in year two, and 4% in year three, and gives you the option to do a penalty-free withdrawal each time the rate increases. That is the best of all worlds! A 1-year rate that beats most of the competition, a guaranteed rate increase when yield curves seem to indicate expectations for continued low yields, and the option to get out early for free if rates increase more than expected. I happen to already be a member of this CU, and will be working on getting some money into one or more of these CDs starting tomorrow.

Kevin
That sounds like a good deal in this current rate environment - I know the exact CAGR may be a little diffrent, but roughly a 3.5% 3-year CD.

Do you mind saying who the CU is and any restrictions as to membership, history of closing these offers quickly, etc..?

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 12:19 pm
by ruralavalon
Bambuk wrote:
Thu Jan 10, 2019 10:11 pm
Capital One 360 currently offers pretty much the same rate (2.70% - 2.80) for 1 , 2 and 3 year CDs.
Assuming the FED will raise rates 1 more time in 2019 and then a recession starts in 2020 and the FED either start cutting the rates (lets say a year from now) and/or indicates the cuts are coming later in 2020.

So in early 2020 the rate will be same as right now but the anticipation will be for the rates to go lower.
Would that mean the CD rates will be lower?
I am afraid that if I go with 1 year CD then a year from now the rates might be lower if the prevailing expectation will be for the rates to go lower.
Of course, I might be wrong.
If the rates are close to current ones in yearly 2020, then I would rather invest in 1 year CD right now and see what happens then.
Or should I go with 2 year CD? 3 years (assuming the rates are going down).
TIA.
I wouldn't try to predict what the FOMC will do this year or next, or whether a recession will occur.

An alternative to those CDs and with a similar return could be Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.71%

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 1:09 pm
by Tarkus
Why not hedge and split your investment into a 3 year ladder? Put 33% in the 1 year, 33% in the 2 year and 33% in the 3 year.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 2:46 pm
by likashing
Kevin M wrote:
Thu Jan 10, 2019 11:29 pm
I am continuing to hold my intermediate-term bond funds and CDs for now, which hedges the reinvestment risk somewhat.
Which bond fund do you use Kevin? I have some IRA CD maturing and will re-invest some in bond fund. I also want to avoid mortgage backed bonds in TBM.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 2:59 pm
by ruralavalon
likashing wrote:
Fri Jan 11, 2019 2:46 pm
Kevin M wrote:
Thu Jan 10, 2019 11:29 pm
I am continuing to hold my intermediate-term bond funds and CDs for now, which hedges the reinvestment risk somewhat.
Which bond fund do you use Kevin? I have some IRA CD maturing and will re-invest some in bond fund. I also want to avoid mortgage backed bonds in TBM.
I am not Kevin.

I use Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) which does not invest in Mortgage Backed Securities, overall it is about 50% government bonds and 50% corporate bonds.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 4:47 pm
by dm200
Advertised and disclosed rates on savings/deposit accounts are expressed not as APR but as APY (Annuel Percentage Yield)

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 5:20 pm
by likashing
ruralavalon wrote:
Fri Jan 11, 2019 2:59 pm
likashing wrote:
Fri Jan 11, 2019 2:46 pm
Kevin M wrote:
Thu Jan 10, 2019 11:29 pm
I am continuing to hold my intermediate-term bond funds and CDs for now, which hedges the reinvestment risk somewhat.
Which bond fund do you use Kevin? I have some IRA CD maturing and will re-invest some in bond fund. I also want to avoid mortgage backed bonds in TBM.
I am not Kevin.

I use Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) which does not invest in Mortgage Backed Securities, overall it is about 50% government bonds and 50% corporate bonds.
Thanks. I am considering that one, as well as VFIUX vs VSIGX. I am not sure about the difference between the 2 intermediate term treasury funds though.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Fri Jan 11, 2019 6:24 pm
by averagedude
Assuming you may need the money in three years, if you think interest rates will go up i would go with a 1 year CD. If you think rates are going to go down due to a recession, i would go with a total bond fund. Determining where interest rates will be in the future is a crap shoot where no one really knows and most investors will probably get it wrong. You should always keep your goals in mind when making an investing decision of this nature.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sat Jan 12, 2019 9:12 am
by ruralavalon
likashing wrote:
Fri Jan 11, 2019 5:20 pm
ruralavalon wrote:
Fri Jan 11, 2019 2:59 pm
likashing wrote:
Fri Jan 11, 2019 2:46 pm
Kevin M wrote:
Thu Jan 10, 2019 11:29 pm
I am continuing to hold my intermediate-term bond funds and CDs for now, which hedges the reinvestment risk somewhat.
Which bond fund do you use Kevin? I have some IRA CD maturing and will re-invest some in bond fund. I also want to avoid mortgage backed bonds in TBM.
I am not Kevin.

I use Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) which does not invest in Mortgage Backed Securities, overall it is about 50% government bonds and 50% corporate bonds.
Thanks. I am considering that one, as well as VFIUX vs VSIGX. I am not sure about the difference between the 2 intermediate term treasury funds though.
It always better to include the fund name, and not just use the ticker symbol.

Vanguard Intermediate-term Treasury Fund Admiral Shares (VFIUX) ER 0.10% is an actively managed fund. Average effective duration = 5.30 years, average credit quality = AA.

Vanguard Intermediate-term Treasury Index Fund Admiral Shares (VSIGX) ER 0.07% is an index fund. It tracks the Bloomberg Barclays U.S. Treasury 3-10 Year Bond Index. Average effective duration = 5.13 years, average credit quality = AAA.

The two funds have had very similar performance.

The above information is from Morningstar.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sat Jan 12, 2019 11:31 am
by j0nnyg1984
Tarkus wrote:
Fri Jan 11, 2019 1:09 pm
Why not hedge and split your investment into a 3 year ladder? Put 33% in the 1 year, 33% in the 2 year and 33% in the 3 year.
Seriously :oops:

How is this even a legitimate thread on these boards?

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sat Jan 12, 2019 10:22 pm
by Kevin M
dm200 wrote:
Fri Jan 11, 2019 4:47 pm
Advertised and disclosed rates on savings/deposit accounts are expressed not as APR but as APY (Annuel Percentage Yield)
Sometimes they disclose both. I happened to be looking at MACU certificate rates today, as my step father has an IRA CD maturing there in a couple of weeks. The table I see shows both rate and APY: https://www.macu.com/rates#nav-savings.

Scroll down and open up Term Deposit to see the certificate rates. I was thinking of having him do an IRA transfer to Vanguard, but the 3-year certificate rate of 3.30% = 3.35% APY looks pretty good in the current environment.

Compare to new-issue 3-year brokered CD at Vanguard at 3.00%, 5-year CD at 3.20%, 3-year Treasury at 2.51%, and 5-year Treasury at 2.52%.

The MACU 3-year is good enough to not mess around with an IRA transfer. Actually, all of their CD rates are competitive with brokered CDs, but the 3-year looks the best to me.

Kevin

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sat Jan 12, 2019 10:31 pm
by Kevin M
likashing wrote:
Fri Jan 11, 2019 2:46 pm
Kevin M wrote:
Thu Jan 10, 2019 11:29 pm
I am continuing to hold my intermediate-term bond funds and CDs for now, which hedges the reinvestment risk somewhat.
Which bond fund do you use Kevin? I have some IRA CD maturing and will re-invest some in bond fund. I also want to avoid mortgage backed bonds in TBM.
Back when I was adding to bond funds, I tended to prefer intermediate-term investment-grade in IRAs, so am still holding some of that. Before I discovered direct CDs, which I felt were much more attractive on a risk/return basis at the time, I also had some in short-term investment grade. I also have a little in long-term investment grade in an IRA. I would prefer the intermediate-term corporate fund, except I don't like the purchase fee.

In taxable I am continuing to hold CA int-term and long-term tax exempt. Some months ago I put some back into limited term tax exempt, (but much more into individual munis, Treasuries, and CDs), but then TLH'd that into short-term Treasury index, which had higher TEY for me as well. I just sold most of that, as well as most of my Treasury money market fund, to put into the stepped-rate CD I mentioned earlier in the thread.

Kevin

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sat Jan 12, 2019 10:43 pm
by surfstar
All America Bank
Mega Money Market account
2.25% up to $50k

no catches

https://allamerica.bank/personal/bankin ... t-checking

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sun Jan 13, 2019 12:35 pm
by KyleAAA
I don't know, so use a 5 year ladder for my ER and don't try to guess the direction of interest rates. I could see rates continuing their upward trajectory as easily as going back down.

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sun Jan 13, 2019 2:00 pm
by Kevin M
KyleAAA wrote:
Sun Jan 13, 2019 12:35 pm
I could see rates continuing their upward trajectory as easily as going back down.
The trajectory has been more down than up over the last two months. The 5-year CMT yield was 3.09% on 11/8/2018, and 2.52% on 1/11/2019. The bottom was 2.37% on 1/3/2019, but that was a big, one-day drop, with the yield at 2.49% on 1/2 and 2.49% on 1/4.

On the other hand, the 6-month CMT yield has been basically flat over the last couple of months, at about 2.5%, so we've seen a significant flattening of the Treasury yield curve recently.

Image

Kevin

Re: CD at 2.70 APR - 1, 2 or 3 years?

Posted: Sun Jan 13, 2019 2:53 pm
by veggivet
My local credit union is offering 3.1% for a 2 year CD...(25 months to be exact)