Fed Rate [may go] to 3% - [investing consequences?]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
btenny
Posts: 4160
Joined: Sun Oct 07, 2007 6:47 pm

Fed Rate [may go] to 3% - [investing consequences?]

Post by btenny » Wed Jan 18, 2017 5:06 pm

I just finished reading the speech by Janet Yellen of the Federal Reserve. She said "it makes sense" to gradually raise interest rates now that we are at full employment. She said they plan to raise rates "a few times a year" through 2019 to get near 3% long term. Previous multiple rate raises in a single year have caused the economy to go down. Plus this will cause bonds to go down for sure.

http://www.cnbc.com/2017/01/18/janet-ye ... s-own.html

I have a diversified mix of intermediate term and short term bonds and some cash mixed with 35% stocks. I sold some stocks/funds late last year. Now I have to decide if I should let my asset allocation stay down (age-5%) or re-balance back to 40% stocks. Or if I should do some tactical asset allocation for a year or two and stay at 35% for now.

What is everyone else doing?
Comments or suggestions?

User avatar
Ged
Posts: 3291
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Fed Rate to 3%

Post by Ged » Wed Jan 18, 2017 5:11 pm

I'm a retired guy with a 40/60 allocation mostly in short and intermediate bond funds. I will rebalance if the value of the bonds drop more than 10%.

Otherwise I welcome our new higher yield overlords.

Now back to my nap.

livesoft
Posts: 56546
Joined: Thu Mar 01, 2007 8:00 pm

Re: Fed Rate to 3%

Post by livesoft » Wed Jan 18, 2017 5:14 pm

You won't like what I am doing, but I will tell you anyways.

Whenever my bond ETFs go up 0.4% to 0.5% in a day, I sell a big slug of them. This happened yesterday. Then when they go down 0.4% to 0.5% the next day, I buy a big slug of them. I usually ping-pong back and forth between BND and AGG in a tax-deferred account with free trades, so no tax cost, no transaction fees, and essentially no change in asset allocation except for a few hours. It is helpful to know JY's public speaking schedule, too.
This signature message sponsored by sscritic: Learn to fish.

wolf359
Posts: 1006
Joined: Sun Mar 15, 2015 8:47 am

Re: Fed Rate to 3%

Post by wolf359 » Wed Jan 18, 2017 5:18 pm

Yellen has repeatedly given speeches over the past couple of years indicating her intent to gradually raise rates. When she raised them and the stock market crashed, she paused (like the events of last Jan-Mar, which followed a hike in December. )

You just have to take a wait and see attitude. The Fed declares their intentions, but they're flexible and may or may not follow through.

The political players are different this time around, and there's no longer a pending election. So who knows?

Keep an asset allocation you're comfortable with. If it varies too much, rebalance.

User avatar
patrick013
Posts: 1842
Joined: Mon Jul 13, 2015 7:49 pm

Re: Fed Rate to 3%

Post by patrick013 » Wed Jan 18, 2017 5:20 pm

btenny wrote: She said they plan to raise rates "a few times a year" through 2019 to get near 3% long term.


If you are convinced that's the new long term bond rate I'd buy bonds
with cash in 2020.
age in bonds, buy-and-hold, 10 year business cycle

User avatar
dm200
Posts: 13698
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Fed Rate to 3%

Post by dm200 » Wed Jan 18, 2017 5:28 pm

1. The Fed controls short term rates. Long term rates can move or not move very differently

2. This might be the intent, but economic (and perhaps other) changes may cause change to this intent.

User avatar
EyeYield
Posts: 563
Joined: Tue Sep 18, 2012 6:43 pm
Location: Extremistan

Re: Fed Rate to 3%

Post by EyeYield » Wed Jan 18, 2017 5:55 pm

From everything I've read, it has been proven time and again that no one can predict the future and I would assume that would also apply to Janet Yellen.

I wonder if Mr. Bogle would approve of me changing my signature to read, "The Fed is a giant distraction from the business of investing"? :mrgreen:
"The stock market is a giant distraction from the business of investing." - Jack Bogle

Nick341981
Posts: 95
Joined: Sat Sep 19, 2015 1:47 pm

Re: Fed Rate to 3%

Post by Nick341981 » Wed Jan 18, 2017 5:59 pm

If you seriously think Janet will be running the fed in 2019 you're crazy. She is getting a new boss soon who is not a big fan. Nobody knows where interest rates will be in 2019.

User avatar
Toons
Posts: 12015
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Fed Rate to 3%

Post by Toons » Wed Jan 18, 2017 6:01 pm

70/30
Stock Bond.
No plans to change anything.
Will accept the changes the market offers.
:D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Grt2bOutdoors
Posts: 17138
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Fed Rate to 3%

Post by Grt2bOutdoors » Wed Jan 18, 2017 6:02 pm

When rates go up, I buy. When rates go down, I buy.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

User avatar
patrick013
Posts: 1842
Joined: Mon Jul 13, 2015 7:49 pm

Re: Fed Rate to 3%

Post by patrick013 » Wed Jan 18, 2017 6:05 pm

Well if that's supposed to be the FFR for the long term I'm
sure the interest tree will equilibrate within 6 months to a
year to normal or average spreads. I'm surprised you're not.
Barring of course excessive foreign purchases. That may
very well happen as their rates could stay lower than ours.
age in bonds, buy-and-hold, 10 year business cycle

aqan
Posts: 256
Joined: Fri Nov 06, 2015 7:07 am

Re: Fed Rate to 3%

Post by aqan » Wed Jan 18, 2017 6:26 pm

Nick341981 wrote:If you seriously think Janet will be running the fed in 2019 you're crazy. She is getting a new boss soon who is not a big fan. Nobody knows where interest rates will be in 2019.

Exactly what i was thinking this afternoon. She will probably leave on her own before the summer ends.

Tanelorn
Posts: 1298
Joined: Thu May 01, 2014 9:35 pm

Re: Fed Rate to 3%

Post by Tanelorn » Wed Jan 18, 2017 7:08 pm

EyeYield wrote:From everything I've read, it has been proven time and again that no one can predict the future and I would assume that would also apply to Janet Yellen.

She doesn't need to predict the future - she can move the whole market just by giving a speech. Kinda like a longer and more nuanced version of how this election saw big swings in stock prices based on the candidates' tweets.

Quark
Posts: 1045
Joined: Sun Nov 01, 2015 5:32 pm

Re: Fed Rate to 3%

Post by Quark » Wed Jan 18, 2017 7:14 pm

Fed officials have been predicting rate increases and then not increasing rates nearly as much for many years now. Whether the Fed will carry through is anyone's guess.

The market has already incorporated this information into pricing. That's among the reasons that it's virtually impossible to outguess the market on the direction of rates (it already knows what you know and is at least as good as you at analyzing the information). Investing on the assumption that you know the path of future rates is just about always a mistake.

tigerdoc93
Posts: 90
Joined: Wed Oct 07, 2015 8:50 pm

Re: Fed Rate to 3%

Post by tigerdoc93 » Wed Jan 18, 2017 7:38 pm

Livesoft: I've sold bonds in past when they go up a significant amount. But due to frequent trading restrictions I typically wait for a month to buy them back. How do you get around the frequent trade restrictions? My accounts are at Vanguard. Do you buy a similar but not identical fund?

User avatar
Ged
Posts: 3291
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Fed Rate to 3%

Post by Ged » Wed Jan 18, 2017 7:41 pm

Nick341981 wrote:If you seriously think Janet will be running the fed in 2019 you're crazy. She is getting a new boss soon who is not a big fan. Nobody knows where interest rates will be in 2019.


Nobody knows what interest rates will be in 2019. [OT comment removed by admin alex]

livesoft
Posts: 56546
Joined: Thu Mar 01, 2007 8:00 pm

Re: Fed Rate to 3%

Post by livesoft » Wed Jan 18, 2017 7:43 pm

@tigerdoc93, I use TDAmeritrade and their no-transaction ETF deal which has some restrictions. But I am not selling ALL my AGG and buying BND, nor vice versa. Plus these trades don't happen very often, so I can follow their rules and not pay any fees.

Also note, that one doesn't have to make money on every round trip nor does one need to trade every time a "trigger" happens. One can just hope that the net trading is more profitable than doing nothing. So folks doing something like this had better keep excellent records for comparison to doing nothing (that is, buy-and-hold), otherwise they may just be costing themselves money while thinking they are very clever.
This signature message sponsored by sscritic: Learn to fish.

tigerdoc93
Posts: 90
Joined: Wed Oct 07, 2015 8:50 pm

Re: Fed Rate to 3%

Post by tigerdoc93 » Wed Jan 18, 2017 7:50 pm

Thanks for the response livesoft.

User avatar
Kevin M
Posts: 8866
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Fed Rate to 3%

Post by Kevin M » Wed Jan 18, 2017 7:57 pm

btenny wrote:Previous multiple rate raises in a single year have caused the economy to go down. Plus this will cause bonds to go down for sure.

Really? For sure?

Image

Note that during this period of federal funds rate (FFR) increases, the 10-year yield decreased (which of course means the price of 10-year Treasuries increased). Of course the 1-month yield increased along with the FFR.

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

User avatar
EyeYield
Posts: 563
Joined: Tue Sep 18, 2012 6:43 pm
Location: Extremistan

Re: Fed Rate to 3%

Post by EyeYield » Wed Jan 18, 2017 8:21 pm

Tanelorn wrote:
EyeYield wrote:From everything I've read, it has been proven time and again that no one can predict the future and I would assume that would also apply to Janet Yellen.

She doesn't need to predict the future - she can move the whole market just by giving a speech. Kinda like a longer and more nuanced version of how this election saw big swings in stock prices based on the candidates' tweets.

Exactly, that's why it's so important to stay the course. There's no shortage of information (noise) that moves the markets short term. Job numbers, CPI, GDP, earnings, housing, global events, technical indicators, rate expectations, and now Tweets, etc. All the individual investor has to do is interpret how the information will impact the market and act accordingly - and to make a profit, do it before anybody else.
Rarely does a piece of information today affect the market 2 years down the road, because there will be another piece of information tomorrow that changes yesterday's information; repeat.

IPS, stay the course, ignore the noise.
"The stock market is a giant distraction from the business of investing." - Jack Bogle

User avatar
Ged
Posts: 3291
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Fed Rate to 3%

Post by Ged » Wed Jan 18, 2017 8:34 pm

Quark wrote:
Ged wrote:
Nick341981 wrote:If you seriously think Janet will be running the fed in 2019 you're crazy. She is getting a new boss soon who is not a big fan. Nobody knows where interest rates will be in 2019.

Nobody knows what interest rates will be in 2019. However it's worth noting that the new boss is not a fan of very low interest rates.

He also said the Fed was keeping interest rates low to help the current president, which suggests he believes low rates are good for the economy, which implies a certain positive feeling towards low rates.

The Fed is stated to be an independent agency, not subject to political influence.


Yellen's term ends January 2018. Trump is free to nominate someone else at this point.

User avatar
patrick013
Posts: 1842
Joined: Mon Jul 13, 2015 7:49 pm

Re: Fed Rate to 3%

Post by patrick013 » Wed Jan 18, 2017 9:47 pm

Kevin M wrote:
Image

Note that during this period of federal funds rate (FFR) increases, the 10-year yield decreased (which of course means the price of 10-year Treasuries increased). Of course the 1-month yield increased along with the FFR.

Kevin


Hi,

Here, the term dynamic is driven by a single factor, the FFR,
or the most expected short-term interest rate.

Assuming that one single factor is at the origin of all deviations
of the yield curve, one can only expect parallel shifts. There are
only two possible movements, a decreasing movement and an increasing
movement. A single factor may not be capable of properly measuring
interest rate volatility of various maturities.

Multi-factors, used to explain bond prices and spreads can properly
measure interest rate volatility. Not in the form of rate predictions
but rather rate reality. Volume spikes, foreign purchases, money supply,
are some multi-factors. The term structure dynamics is driven by a single
factor, the short-term interest rate, is one of the main limitations of
using changes in the short rate as a proxy for changes in the level of
the term structure, and as the basis for an interest rate tree model.

Pricing error, without trying to use a linear model, can be explained by
observing the other various non-linear multi-factors when the normal
spreads have been breached. In this case foreign purchases is a better
observation than the change in FFR, but that is really a lengthy overbought
condition then. But quite possible and certainly equatable if one was there
and had the data to do so. I don't think the time value of money did it
as that would put the rate even higher...and also...Well, that's enough.

Without the data the model is too big for it's equation. :)
age in bonds, buy-and-hold, 10 year business cycle

User avatar
Index Fan
Posts: 2496
Joined: Wed Mar 07, 2007 12:13 pm
Location: The great Midwest

Re: Fed Rate to 3%

Post by Index Fan » Wed Jan 18, 2017 9:48 pm

Ged wrote:I'm a retired guy with a 40/60 allocation mostly in short and intermediate bond funds. I will rebalance if the value of the bonds drop more than 10%.

Otherwise I welcome our new higher yield overlords.

Now back to my nap.



Now THAT is a true Boglehead!
"Optimum est pati quod emendare non possis." | -Seneca

User avatar
David Jay
Posts: 3984
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Fed Rate to 3%

Post by David Jay » Thu Jan 19, 2017 11:22 am

If I knew with metaphysical certainty that interest rates were going up incrementally for the next 3 years and then interest rates would level out for the forseeable future, I would put all of my bond money in ST bonds for 3 years, then switch to Intermediate Term / Long Term (depending on how long I knew interest rates would remain stable).

I don't, so I won't.

See my signature below v v v v
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
VictoriaF
Posts: 17491
Joined: Tue Feb 27, 2007 7:27 am
Location: Black Swan Lake

Re: Fed Rate to 3%

Post by VictoriaF » Thu Jan 19, 2017 11:34 am

btenny wrote:What is everyone else doing?
Comments or suggestions?


I have opened a couple of 7-year 3% APY CDs with Andrews FCU. If by 2020 interest rates rise to 3%, and CDs with >>3% interest become available, I will calculate the trade-off between penalties of closing existing CDs and benefits of new CDs.

Generally, low inflation and low interest rates are preferable to high inflation and high interest rates, because taxation is of nominal interest, not real interest.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

letsgobobby
Posts: 10614
Joined: Fri Sep 18, 2009 1:10 am

Re: Fed Rate to 3%

Post by letsgobobby » Thu Jan 19, 2017 11:37 am

btenny wrote:I just finished reading the speech by Janet Yellen of the Federal Reserve. She said "it makes sense" to gradually raise interest rates now that we are at full employment. She said they plan to raise rates "a few times a year" through 2019 to get near 3% long term. Previous multiple rate raises in a single year have caused the economy to go down. Plus this will cause bonds to go down for sure.

http://www.cnbc.com/2017/01/18/janet-ye ... s-own.html

I have a diversified mix of intermediate term and short term bonds and some cash mixed with 35% stocks. I sold some stocks/funds late last year. Now I have to decide if I should let my asset allocation stay down (age-5%) or re-balance back to 40% stocks. Or if I should do some tactical asset allocation for a year or two and stay at 35% for now.

What is everyone else doing?
Comments or suggestions?

JY's crystal ball is no clearer than yours or mine. Our debt-leveraged economy could not handle 3% and I believe she knows that. She's trying to get the markets to do the heavy lifting for her.

3 years from now is a long time. personally I do not believe the overnight rate will be 3% in 2019. I am planning to buy my usual allocation of EE bonds this year (3.5% over 20 years) and almost nothing she could say would change my mind about it.

User avatar
White Coat Investor
Posts: 12850
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Fed Rate to 3%

Post by White Coat Investor » Thu Jan 19, 2017 11:43 am

btenny wrote:I just finished reading the speech by Janet Yellen of the Federal Reserve. She said "it makes sense" to gradually raise interest rates now that we are at full employment. She said they plan to raise rates "a few times a year" through 2019 to get near 3% long term. Previous multiple rate raises in a single year have caused the economy to go down. Plus this will cause bonds to go down for sure.

http://www.cnbc.com/2017/01/18/janet-ye ... s-own.html

I have a diversified mix of intermediate term and short term bonds and some cash mixed with 35% stocks. I sold some stocks/funds late last year. Now I have to decide if I should let my asset allocation stay down (age-5%) or re-balance back to 40% stocks. Or if I should do some tactical asset allocation for a year or two and stay at 35% for now.

What is everyone else doing?
Comments or suggestions?


I've discovered that making changes in my asset allocation for whatever reason has not had a significant effect on my ability to build wealth so I honestly spend less and less time on it every year. I certainly don't make changes in response to Fed statements. Instead of focusing on having the best investments, I suggest you focus on being the best investor.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Alex Frakt
Founder
Posts: 10730
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by Alex Frakt » Thu Jan 19, 2017 11:57 am

Please stick to the investing issues presented here. For example, speculating on the actions of politicians and Fed Chairmen are off-topic.

User avatar
nisiprius
Advisory Board
Posts: 34135
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: Fed Rate to 3%

Post by nisiprius » Thu Jan 19, 2017 12:04 pm

btenny wrote:[consider the case where the overnight rate rises] "a few times a year" through 2019 to get near 3% long term... this [would] cause bonds to go down for sure.
Yes, it would. By how much?

The Fed Funds rate is now 0.75%. Getting to 3% by the end of 2019 would imply an increase of 2.25% over a period of three years, or 0.75% per year in the Fed rate. The 7-year Treasury rate is currently 2.26%. If we assume that a rise of 2.25% in the Fed rate means a rise of 2.25% in the Treasury 7-year rate, which is by no means certain, then this would be the effect on a computer-simulated rolling bond portfolio with a duration of 6 years--similar to Total Bond. As always, not to hide anything, I am plotting total return, on the assumption that you are going to keep the bond interest payments and not throw them away or give them to charity.

Image

Yes, during the three years that the rate is rising, the bond portfolio would continue to pay out the same interest payments as always, while the value of the fund shares would drop just a bit more than the payments, so that overall, if you reinvested interest, you would $1,000 investment in the portfolio would decline to $977. If the interest rate then held steady at 4.51% it would then quickly recover and being rising faster than before.

Obviously, if you knew for sure of something better, well, something better would be better, but that doesn't look apocalyptic.

Not to hide anything, if you want to look at price alone, which I don't think is a sensible thing to look at, it would drop from $1,000 to $897 and then recover. Notice--this is a detail, but an important detail--it does not drop a full 2.25% x 6 years duration = 12.75%, it only drops 10.03%. For a ballpark number, interest rise x duration is reasonable if the rise is fairly quick, but if it is gradual you will start to see an effect from all of the bonds in the portfolio rising over time as they approach maturity.

Price only, using the bond coupon interest to light cigars:
Image
Last edited by nisiprius on Thu Jan 19, 2017 12:12 pm, edited 4 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.

User avatar
bligh
Posts: 547
Joined: Wed Jul 27, 2016 9:13 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by bligh » Thu Jan 19, 2017 12:13 pm

Personally, I am very much looking forward to the rising interest rates. I actually hope they rise beyond just the 3%. The only time I wouldn't be looking forward to rising interest rates is if I was no longer in the accumulation phase. As nisiprius points out anyone not in the decumulation phase stands to gain from rising interest rates. If you are accumulating or simply re-contributing the interest you stand to gain.

I plan to stay the course and rebalance if and when my bonds drop. If you want to actively manage based on JY's guidance, you can drop down to shorter term bonds for the next three years or so.

Either way, I have noticed at times how markets rally when there is bad economic news, and tank on good economic news. Because that means the low rate stimulative environment will last longer or be taken away. The stock market acted like an addict throwing a tantrum. Having an economy strong enough that it doesn't need to be juiced with stimulative interest rates is a very good thing.

btenny
Posts: 4160
Joined: Sun Oct 07, 2007 6:47 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by btenny » Thu Jan 19, 2017 12:44 pm

Well lots of comments. Last night I did some year end account reconciliation. I found that both my bond taxable funds had gone down price wise by about 4% or so between August and December. That is a big hit for a .25% rate change. But I also found that for the whole year 2016 I had made a little money on the taxable funds. I had similar results for my muni funds. All of them went down a lot towards year end 2016. The Intermediate term muni fund and the High yield muni fund both made a little money for the year. But the Limited Term muni actually lost about $200 for the full year 2016.

So based on the above, duration is not necessarily the best criteria for selecting bonds in a raising rate environment.

Good Luck.

livesoft
Posts: 56546
Joined: Thu Mar 01, 2007 8:00 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by livesoft » Thu Jan 19, 2017 12:47 pm

btenny wrote:Well lots of comments. Last night I did some year end account reconciliation. I found that both my bond taxable funds had gone down price wise by about 4% or so between August and December. That is a big hit for a .25% rate change.

But the 10-year Treasury interest rate went up a full 1% in that time frame. This shows that the Fed Funds Rate is perhaps not what one should be looking at.
This signature message sponsored by sscritic: Learn to fish.

rrppve
Posts: 817
Joined: Sun Aug 12, 2012 12:35 am

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by rrppve » Thu Jan 19, 2017 12:57 pm

Think this is just more fuel for the fire as to why CDs and some stable value funds are the better value than bonds in the current market environment.

kenner
Posts: 3129
Joined: Sat Mar 01, 2008 8:45 am

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by kenner » Thu Jan 19, 2017 1:04 pm

btenny wrote: ... duration is not necessarily the best criteria for selecting bonds in a raising rate environment.


Agreed. It is not at all clear that a .25% rise in the overnight interest rate (the Federal Funds Rate) affects all bond market segments equally and proportionately.

boglephreak
Posts: 441
Joined: Fri Apr 22, 2016 5:16 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by boglephreak » Thu Jan 19, 2017 1:06 pm

am i reading this right? she wants to increase it from the current 0.75% to 3.0% by 2019? is that a dramatic increase (seems so to me), and is it common to hike it so much in a relatively short time period?

kenner
Posts: 3129
Joined: Sat Mar 01, 2008 8:45 am

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by kenner » Thu Jan 19, 2017 1:13 pm

boglephreak wrote:am i reading this right? she wants to increase it from the current 0.75% to 3.0% by 2019? is that a dramatic increase (seems so to me), and is it common to hike it so much in a relatively short time period?


Seems she is signalling to the markets that she is willing to do whatever is deemed necessary to restrain possible inflation. It also seems clear that future economic developments will ultimately determine future Fed actions. It does not appear that the Fed has pre-determined its future moves. Stay tuned.

btenny
Posts: 4160
Joined: Sun Oct 07, 2007 6:47 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by btenny » Thu Jan 19, 2017 1:17 pm

How do you guys/gals do CDs for a IRA account? Do you just set up a second IRA account at some place like the Navy Federal Credit Union and then transfer some IRA money to that account. Then what do you do in 2-3 years when the CD expires? Moving stuff around and setting up extra accounts seems a lot of trouble for a little extra money.

And other data that Soft pointed out is the 10 year Treasury rate is still only 2.5%. Way below where it has been for many decades previously. So it is likely to go up some more and soon.

http://www.macrotrends.net/2016/10-year ... ield-chart

Good Luck.

Quark
Posts: 1045
Joined: Sun Nov 01, 2015 5:32 pm

Re: Fed Rate to 3%

Post by Quark » Thu Jan 19, 2017 1:27 pm

letsgobobby wrote:...JY's crystal ball is no clearer than yours or mine. Our debt-leveraged economy could not handle 3% and I believe she knows that. She's trying to get the markets to do the heavy lifting for her....

Our economy has handled higher interest rates at higher debt/gdp levels. If you're investing based on the belief that the economy can't handle 3%, you might want to think more about this. It might be useful to distinguish public and private debt. The government has many advantages when it comes to borrowing and leverage.

In general, the Fed gets what it wants when it makes its desires clear. Raising the fed funds rate is one avenue, but it serves at least as much as a signaling function as it does as something which mechanically moves the yield curve. Giving speeches are another avenue. The markets always do the heavy lifting.

The bottom line continues to be that it's very difficult to predict rates accurately. Investing based on the belief that one can do so is almost always a mistake.
Last edited by Quark on Thu Jan 19, 2017 1:32 pm, edited 1 time in total.

User avatar
CyclingDuo
Posts: 840
Joined: Fri Jan 06, 2017 9:07 am

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by CyclingDuo » Thu Jan 19, 2017 1:28 pm

btenny wrote:I just finished reading the speech by Janet Yellen of the Federal Reserve. She said "it makes sense" to gradually raise interest rates now that we are at full employment. She said they plan to raise rates "a few times a year" through 2019 to get near 3% long term. Previous multiple rate raises in a single year have caused the economy to go down. Plus this will cause bonds to go down for sure.

http://www.cnbc.com/2017/01/18/janet-ye ... s-own.html

I have a diversified mix of intermediate term and short term bonds and some cash mixed with 35% stocks. I sold some stocks/funds late last year. Now I have to decide if I should let my asset allocation stay down (age-5%) or re-balance back to 40% stocks. Or if I should do some tactical asset allocation for a year or two and stay at 35% for now.

What is everyone else doing?
Comments or suggestions?


It certainly could end the 30 year long bull market in bonds. But as others have pointed out, does this mean you alter your long term strategy?

We are currently at the point of balancing our AA, and do wonder about legging in appropriately for our bond portion. What are we doing as a result? Not sure as of yet, but looking closely at VFAIX and FSRBX as a possible counter play for our own personal choices.

letsgobobby
Posts: 10614
Joined: Fri Sep 18, 2009 1:10 am

Re: Fed Rate to 3%

Post by letsgobobby » Thu Jan 19, 2017 1:36 pm

Quark wrote:The bottom line continues to be that it's very difficult to predict rates accurately. Investing based on the belief that one can do so is almost always a mistake.

I agree with you, which is why I ignore JY for investing purposes.

re: rates, the housing market with mortgage rates at 6% or 7% would fail to function in any recognizable form. Now if we're talking about a parallel universe in which growth is 6%, inflation is 4%, and overnight rates are 3%, well, that's a completely different story. I don't buy that will happen by2019 but again, I wouldn't change my investing strategy even if I thought it would.

60/40 covers an awful lot of bases so that's where I hang out.

livesoft
Posts: 56546
Joined: Thu Mar 01, 2007 8:00 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by livesoft » Thu Jan 19, 2017 1:43 pm

btenny wrote:How do you guys/gals do CDs for a IRA account?

It is surprisingly easy.
In my IRA account, I navigate to the "Buy CDs" page and buy a CD. Please take a look in your IRA online to see what I mean.
This signature message sponsored by sscritic: Learn to fish.

User avatar
saltycaper
Posts: 2127
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by saltycaper » Thu Jan 19, 2017 1:49 pm

For the past few years, yield has been between about 0% and 1% for the 10-year TIPS, and between -0.5% and 0.5% for the 5-year. The 10-year auction today came in at 0.43%, pretty much in the middle of the range for the past few years. Shorter maturities, savings accounts, money market accounts, all still negative real yields. I'm not sure why people focus so much on nominal rates. Your savings account paying 5% with 5% inflation is no better than 2% with 2% inflation. Actually, it's probably worse, since you're losing more money to taxes. The investing consequences of the FFR going to 3% depend on what else is happening in the economy. It could be great, like if inflation is hovering around 2%, the economy is humming along, and the 10-year is up at 5%. Or, it could be awful, like if inflation is around 3% and the 30-year bond is at 3% nominal. The FFR alone means pretty much nothing to me.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

User avatar
nisiprius
Advisory Board
Posts: 34135
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: Fed Rate [may go] to 3% - [investing consequences?]

Post by nisiprius » Thu Jan 19, 2017 2:07 pm

btenny wrote:...How do you guys/gals do CDs for a IRA account?...
I go to the bank and tell the customer service rep that I want to open an IRA account with a CD. I do some paperwork. When it comes time for renewal I got some paperwork in the mail that says (annoyingly!) that if I don't get back to them they will roll over the CD at the current rate. Each CD is technically a separate account but I get a single mailing that lists them all on one piece of paper (with a grand total).

It must be good business for the bank because they're always very friendly about it.
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.

User avatar
dm200
Posts: 13698
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by dm200 » Thu Jan 19, 2017 3:38 pm

boglephreak wrote:am i reading this right? she wants to increase it from the current 0.75% to 3.0% by 2019? is that a dramatic increase (seems so to me), and is it common to hike it so much in a relatively short time period?


I do not think this is that uncommon over history.

VaR
Posts: 385
Joined: Sat Dec 05, 2015 11:27 pm

Re: Fed Rate to 3%

Post by VaR » Thu Jan 19, 2017 3:46 pm

Kevin M wrote:
btenny wrote:Previous multiple rate raises in a single year have caused the economy to go down. Plus this will cause bonds to go down for sure.

Really? For sure?

Image

Note that during this period of federal funds rate (FFR) increases, the 10-year yield decreased (which of course means the price of 10-year Treasuries increased). Of course the 1-month yield increased along with the FFR.

Kevin

This particular period was and remains a curiosity in that it defied expectations at the time. Long term rates are not correlated 1.0 with short term rates, but during this time people did expect long term rates to go up. One current explanation for this is the global savings glut. Specifically, that european banks and sovereign wealth funds bought U.S. Treasury securities in large numbers during this period, driving yields down and offsetting the upward pressure on long term rates from short term rates going up.

This effect is also being talked about as one of the causal factors in the asset price bubble - particularly the U.S. housing price bubble starting in 2005.

Quark
Posts: 1045
Joined: Sun Nov 01, 2015 5:32 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by Quark » Thu Jan 19, 2017 3:52 pm

Pick one:

1) Fed increases short rates, longer rates move up in sync due cascading effects of the higher short rates.

2) Fed increases short rates, which slows economy, longer rates decline due to anticipation of the effects of a slower economy.

User avatar
nisiprius
Advisory Board
Posts: 34135
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: Fed Rate [may go] to 3% - [investing consequences?]

Post by nisiprius » Thu Jan 19, 2017 3:58 pm

boglephreak wrote:am i reading this right? she wants to increase it from the current 0.75% to 3.0% by 2019? is that a dramatic increase (seems so to me), and is it common to hike it so much in a relatively short time period?
As noted by Kevin M, it went from 1% to 5.26% from May 2004 to July 2006.

Image

You can see maybe six other places when the Fed rate rose 3% or more within a period of a few years.

VaR wrote:This particular period was and remains a curiosity in that it defied expectations at the time.
If I may twist things a bit, it is not at all a "curiosity" when the bond market "defies expectations at the time." For example, in 2014 a total of 67 out of 67 economists surveyed by Bloomberg predicted the 10-year Treasury rate would rise over the next six months.

It fell.

Image
Last edited by nisiprius on Thu Jan 19, 2017 5:58 pm, edited 5 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.

kenner
Posts: 3129
Joined: Sat Mar 01, 2008 8:45 am

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by kenner » Thu Jan 19, 2017 4:02 pm

Quark wrote:Pick one:

1) Fed increases short rates, longer rates move up in sync due cascading effects of the higher short rates.

2) Fed increases short rates, which slows economy, longer rates decline due to anticipation of the effects of a slower economy.


+1.

It is often asserted (even on this forum) that when the Fed increases the FFR interest rate by .25%, every bond fund of whatever duration instantaneously loses a proportionate value of its net asset value in relation to its duration.

I've never seen proof of that.

User avatar
VictoriaF
Posts: 17491
Joined: Tue Feb 27, 2007 7:27 am
Location: Black Swan Lake

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by VictoriaF » Thu Jan 19, 2017 4:10 pm

nisiprius wrote:
btenny wrote:...How do you guys/gals do CDs for a IRA account?...
I go to the bank and tell the customer service rep that I want to open an IRA account with a CD. I do some paperwork. When it comes time for renewal I got some paperwork in the mail that says (annoyingly!) that if I don't get back to them they will roll over the CD at the current rate. Each CD is technically a separate account but I get a single mailing that lists them all on one piece of paper (with a grand total).

It must be good business for the bank because they're always very friendly about it.


My process is similar except that I use credit unions (CU) to buy my CDs. So far none of my CU IRA CDs have matured. According to Kevin M who has extensive experience with CU CDs, when an IRA CD matures I can authorize another institution, e.g., Vanguard, to pull the funds. When I opened some of my CDs the CU did not ask me what I wanted to do with the money upon maturity and they defaulted to rolling money into another CD. I could not change the disbursement online, but when I visited a branch later they have changed it to rolling into cash.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

User avatar
patrick013
Posts: 1842
Joined: Mon Jul 13, 2015 7:49 pm

Re: Fed Rate [may go] to 3% - [investing consequences?]

Post by patrick013 » Thu Jan 19, 2017 4:19 pm

We know there's going to be a flatter yield curve 10% of the time,
usually at the end of the business cycle, so some supply/demand
inbalance there isn't unexpected. But, one thing is for sure. If
we are to see a nice high (say 5%) TRSY note yield it will not happen
unless there is a nice high (say 3%) and stable FFR for awhile. Very,
very rare if it did. :)
age in bonds, buy-and-hold, 10 year business cycle

Post Reply