Why do people think CD rates will keep going up?

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fortfun
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Why do people think CD rates will keep going up?

Post by fortfun » Sat Nov 17, 2018 9:49 pm

If so, how high will they go?

With stocks, people say don't time the market but with CDs most are saying to stick with 1 year at 2.8% vs 5 years at 4%. Isn't this timing the market and why not take the sure thing 4%?
https://www.connexuscu.org/accounts/share-certificates/

I'm thinking of putting 50k in a 5 year 4% CD that will pay off my mortgage in 5 years, when I hope to retire. This will just help with cash flow in retirement. Many seem to think this is a poor idea. (Mortgage is 3%).

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Re: Why do people think CD rates will keep going up?

Post by Grt2bOutdoors » Sat Nov 17, 2018 10:00 pm

fortfun wrote:
Sat Nov 17, 2018 9:49 pm
If so, how high will they go?

With stocks, people say don't time the market but with CDs most are saying to stick with 1 year at 2.8% vs 5 years at 4%. Isn't this timing the market and why not take the sure thing 4%?
https://www.connexuscu.org/accounts/share-certificates/

I'm thinking of putting 50k in a 5 year 4% CD that will pay off my mortgage in 5 years, when I hope to retire. This will just help with cash flow in retirement. Many seem to think this is a poor idea. (Mortgage is 3%).
Fed had telegraphed rates are moving up, expectations are another 2 to 4 ratchets upwards. So anywhere from 50 to 100 bps.
As other alternatives in the fixed income space adjust to rate movements, banks will need to offer similar if not higher rates to secure their own level of funding. You should invest according to your own risk tolerance, who cares what others think, it’s your peace of mind that counts, not theirs.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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fortfun
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Re: Why do people think CD rates will keep going up?

Post by fortfun » Sat Nov 17, 2018 10:09 pm

Grt2bOutdoors wrote:
Sat Nov 17, 2018 10:00 pm
fortfun wrote:
Sat Nov 17, 2018 9:49 pm
If so, how high will they go?

With stocks, people say don't time the market but with CDs most are saying to stick with 1 year at 2.8% vs 5 years at 4%. Isn't this timing the market and why not take the sure thing 4%?
https://www.connexuscu.org/accounts/share-certificates/

I'm thinking of putting 50k in a 5 year 4% CD that will pay off my mortgage in 5 years, when I hope to retire. This will just help with cash flow in retirement. Many seem to think this is a poor idea. (Mortgage is 3%).
Fed had telegraphed rates are moving up, expectations are another 2 to 4 ratchets upwards. So anywhere from 50 to 100 bps.
As other alternatives in the fixed income space adjust to rate movements, banks will need to offer similar if not higher rates to secure their own level of funding. You should invest according to your own risk tolerance, who cares what others think, it’s your peace of mind that counts, not theirs.
Thanks Grt2boutdoors! I don't want to do anything stupid and I'm relatively new to this arena. Maybe I'll stick with this one year and see what happens with interest rates/cd rates.

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Re: Why do people think CD rates will keep going up?

Post by HEDGEFUNDIE » Sat Nov 17, 2018 10:11 pm

Yes it is timing the market.

Sometimes market timing works. Other times it doesn’t.

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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Sat Nov 17, 2018 10:37 pm

fortfun wrote:
Sat Nov 17, 2018 9:49 pm
With stocks, people say don't time the market but with CDs most are saying to stick with 1 year at 2.8% vs 5 years at 4%.
The DFA/Swedroe 'rule' with CDs is to keep extending the maturity until the point where adding one additional year would result in additional yield of under .2% (20 basis points). Many like this guideline. Based on the numbers you've cited, it could easily be that a CD with a maturity of fewer than five years would be warranted according to this rule. But I haven't recently compared the yield curve on CDs, so I don't know for certain.
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Re: Why do people think CD rates will keep going up?

Post by fortfun » Sat Nov 17, 2018 11:01 pm

willthrill81 wrote:
Sat Nov 17, 2018 10:37 pm
fortfun wrote:
Sat Nov 17, 2018 9:49 pm
With stocks, people say don't time the market but with CDs most are saying to stick with 1 year at 2.8% vs 5 years at 4%.
The DFA/Swedroe 'rule' with CDs is to keep extending the maturity until the point where adding one additional year would result in additional yield of under .2% (20 basis points). Many like this guideline. Based on the numbers you've cited, it could easily be that a CD with a maturity of fewer than five years would be warranted according to this rule. But I haven't recently compared the yield curve on CDs, so I don't know for certain.
Here's what I came up with. Does this help. Seems like 4% is pretty good.
Image

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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Sat Nov 17, 2018 11:06 pm

fortfun wrote:
Sat Nov 17, 2018 9:49 pm
If so, how high will they go?

With stocks, people say don't time the market but with CDs most are saying to stick with 1 year at 2.8% vs 5 years at 4%. Isn't this timing the market and why not take the sure thing 4%?
https://www.connexuscu.org/accounts/share-certificates/

I'm thinking of putting 50k in a 5 year 4% CD that will pay off my mortgage in 5 years, when I hope to retire. This will just help with cash flow in retirement. Many seem to think this is a poor idea. (Mortgage is 3%).
The spread between 2-yr and 5-yr CDs at most banks is like 0.3%-0.4%.
Connexus is the only one that has:
- 5yr, 4%,
- 2yr, 3.2%.
https://www.connexuscu.org/accounts/share-certificates/

So they have a particularly high 2Yrd, and then a monster spread of a 0.8% to go to 5Yr.

Probably worth the extra duration to lock up for 5 years here.

Also, as far as Connexus go, I would not get the 3Yr or the 4Yr (over the 2Yr), because the additional yield on those is not that much. In fact, 4 over 3 has no additional yield.

If you look at the US treasury curve, the spread between the 2Yr and the 5Yr has been probably 0.1 - 0.12% for a while now.
https://www.treasury.gov/resource-cente ... data=yield
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Re: Why do people think CD rates will keep going up?

Post by fortfun » Sat Nov 17, 2018 11:12 pm

AlphaLess wrote:
Sat Nov 17, 2018 11:06 pm
Thanks AlphaLess.

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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Sat Nov 17, 2018 11:27 pm

fortfun wrote:
Sat Nov 17, 2018 11:01 pm
willthrill81 wrote:
Sat Nov 17, 2018 10:37 pm
fortfun wrote:
Sat Nov 17, 2018 9:49 pm
With stocks, people say don't time the market but with CDs most are saying to stick with 1 year at 2.8% vs 5 years at 4%.
The DFA/Swedroe 'rule' with CDs is to keep extending the maturity until the point where adding one additional year would result in additional yield of under .2% (20 basis points). Many like this guideline. Based on the numbers you've cited, it could easily be that a CD with a maturity of fewer than five years would be warranted according to this rule. But I haven't recently compared the yield curve on CDs, so I don't know for certain.
Here's what I came up with. Does this help. Seems like 4% is pretty good.
Image
Following that link, the DFA/Swedroe rule would call for 2 year CDs, since the added rate by extending to three years is just .15%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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fortfun
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Re: Why do people think CD rates will keep going up?

Post by fortfun » Sat Nov 17, 2018 11:39 pm

willthrill81 wrote:
Sat Nov 17, 2018 11:27 pm



Following that link, the DFA/Swedroe rule would call for 2 year CDs, since the added rate by extending to three years is just .15%.
Thanks WillThrill.

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Re: Why do people think CD rates will keep going up?

Post by sport » Sat Nov 17, 2018 11:54 pm

fortfun wrote:
Sat Nov 17, 2018 9:49 pm
I'm thinking of putting 50k in a 5 year 4% CD that will pay off my mortgage in 5 years, when I hope to retire. This will just help with cash flow in retirement. Many seem to think this is a poor idea. (Mortgage is 3%).
Since you can get CDs that yield more than 3%, there is little to be gained by paying it off. If you also consider inflation, you get to pay off the mortgage with cheaper dollars. You may get some peace of mind by having a paid-off mortgage. However, having the money to pay it off any time you wish can give the same peace of mind.

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Re: Why do people think CD rates will keep going up?

Post by venkman » Sun Nov 18, 2018 1:24 am

fortfun wrote:
Sat Nov 17, 2018 11:39 pm
willthrill81 wrote:
Sat Nov 17, 2018 11:27 pm
Following that link, the DFA/Swedroe rule would call for 2 year CDs, since the added rate by extending to three years is just .15%.
Thanks WillThrill.
But the 5-year CD rate is 120 basis points higher than the 1-year CD, for an extra 30 bps per year. Compared to any of the other lengths offered, the 5-year CD gives you more than an extra 20 bps per year.

That 4% rate is well above what 5-year brokered CD's are going for (currently 3.55% on Vanguard). I'd be tempted to take it.

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Re: Why do people think CD rates will keep going up?

Post by aristotelian » Sun Nov 18, 2018 3:30 am

As with any bond or CD, the market is pricing in the best available risk free return. You are always taking the risk of interest rates increasing as well as opportunity cost of money out of market. 4% is a very good deal. I recently purchased a 5 year CD at 3.5%. I get 4% from TIAA Traditional but that ties up funds for 9 years.

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Re: Why do people think CD rates will keep going up?

Post by Doc » Sun Nov 18, 2018 9:23 am

willthrill81 wrote:
Sat Nov 17, 2018 10:37 pm
The DFA/Swedroe 'rule' with CDs is to keep extending the maturity until the point where adding one additional year would result in additional yield of under .2% (20 basis points).
That rule was published is his bond book back before the financial crisis. Does any one know if has been revised since then? I haven't been able to find anything.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Sun Nov 18, 2018 10:31 am

venkman wrote:
Sun Nov 18, 2018 1:24 am
fortfun wrote:
Sat Nov 17, 2018 11:39 pm
willthrill81 wrote:
Sat Nov 17, 2018 11:27 pm
Following that link, the DFA/Swedroe rule would call for 2 year CDs, since the added rate by extending to three years is just .15%.
Thanks WillThrill.
But the 5-year CD rate is 120 basis points higher than the 1-year CD, for an extra 30 bps per year. Compared to any of the other lengths offered, the 5-year CD gives you more than an extra 20 bps per year.
That's a good point. The DFA/Swedroe rule is based on a marginal (i.e. one at a time) comparison of the rates for different terms. I've not heard of anyone using it to directly compare something like a 1 year to a 5 year. One reason that could be argued against doing it that way is because there may no significant rate increase in going from 1 year to 5 years versus 1 year to 4 years, for instance.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why do people think CD rates will keep going up?

Post by fortfun » Sun Nov 18, 2018 12:21 pm

sport wrote:
Sat Nov 17, 2018 11:54 pm
fortfun wrote:
Sat Nov 17, 2018 9:49 pm
I'm thinking of putting 50k in a 5 year 4% CD that will pay off my mortgage in 5 years, when I hope to retire. This will just help with cash flow in retirement. Many seem to think this is a poor idea. (Mortgage is 3%).
Since you can get CDs that yield more than 3%, there is little to be gained by paying it off. If you also consider inflation, you get to pay off the mortgage with cheaper dollars. You may get some peace of mind by having a paid-off mortgage. However, having the money to pay it off any time you wish can give the same peace of mind.
Thanks Sport. I'm just not sure that 50k will be worth 60k in 5 years, in the stock market (could be more, could be less). We will just be 50 years old and much of our other money will be tied up in 401Ks, 403Bs, etc. I know we can do Roth conversions but it might be nice to eliminate this 1.2k/month expense at that time and not have to rely so much on our retirement accounts. Current sit:
125k remaining on mortgage. 10 years remaining. 1.2k/month. 3%. 600k home.

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Re: Why do people think CD rates will keep going up?

Post by sport » Sun Nov 18, 2018 12:24 pm

fortfun wrote:
Sun Nov 18, 2018 12:21 pm
I'm just not sure that 50k will be worth 60k in 5 years, in the stock market (could be more, could be less).
Since CDs are yielding more than your mortgage rate, you could put the money into CDs and not be concerned about the stock market.

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Re: Why do people think CD rates will keep going up?

Post by fortfun » Sun Nov 18, 2018 12:32 pm

aristotelian wrote:
Sun Nov 18, 2018 3:30 am
As with any bond or CD, the market is pricing in the best available risk free return. You are always taking the risk of interest rates increasing as well as opportunity cost of money out of market. 4% is a very good deal. I recently purchased a 5 year CD at 3.5%. I get 4% from TIAA Traditional but that ties up funds for 9 years.
Thanks aristotelian. I'm leaning more and more toward this option. Might just look at it as a portion of my bonds allocation.

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Re: Why do people think CD rates will keep going up?

Post by fortfun » Sun Nov 18, 2018 12:33 pm

sport wrote:
Sun Nov 18, 2018 12:24 pm
fortfun wrote:
Sun Nov 18, 2018 12:21 pm
I'm just not sure that 50k will be worth 60k in 5 years, in the stock market (could be more, could be less).
Since CDs are yielding more than your mortgage rate, you could put the money into CDs and not be concerned about the stock market.
Thanks Sport. Yes, that's what I was thinking. In five years, I'd re-assess the best use of the 50k + 10k interest and decide whether or not to pay off the mortgage.

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Re: Why do people think CD rates will keep going up?

Post by randomizer » Sun Nov 18, 2018 12:35 pm

Sounds like a fine plan. Zero-risk way to guarantee the peace of mind that you'll be ready to pay your mortgage.
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Re: Why do people think CD rates will keep going up?

Post by aristotelian » Sun Nov 18, 2018 1:33 pm

fortfun wrote:
Sun Nov 18, 2018 12:32 pm
aristotelian wrote:
Sun Nov 18, 2018 3:30 am
As with any bond or CD, the market is pricing in the best available risk free return. You are always taking the risk of interest rates increasing as well as opportunity cost of money out of market. 4% is a very good deal. I recently purchased a 5 year CD at 3.5%. I get 4% from TIAA Traditional but that ties up funds for 9 years.
Thanks aristotelian. I'm leaning more and more toward this option. Might just look at it as a portion of my bonds allocation.
Counterpoint: the mortgage is a negative bond so this really amounts to an arbitrage play. The question is whether the differential in interest rates I'd worth the trouble of keeping the mortgage payment.

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Re: Why do people think CD rates will keep going up?

Post by JoeJohnson » Sun Nov 18, 2018 1:36 pm

sport wrote:
Sat Nov 17, 2018 11:54 pm
fortfun wrote:
Sat Nov 17, 2018 9:49 pm
I'm thinking of putting 50k in a 5 year 4% CD that will pay off my mortgage in 5 years, when I hope to retire. This will just help with cash flow in retirement. Many seem to think this is a poor idea. (Mortgage is 3%).
Since you can get CDs that yield more than 3%, there is little to be gained by paying it off. If you also consider inflation, you get to pay off the mortgage with cheaper dollars. You may get some peace of mind by having a paid-off mortgage. However, having the money to pay it off any time you wish can give the same peace of mind.
Depends on marginal tax rate. A 4% CD would only net me around 2.8% after tax. I also cannot deduct mortgage interest with the new tax reform. 2.8% is net loss compared to the 3% mortgage, albeit small. If for sure paying mortgage off in 5 years and there is no need for the liquidity, it would be better to pay off the mortgage.

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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Sun Nov 18, 2018 3:35 pm

Doc wrote:
Sun Nov 18, 2018 9:23 am
willthrill81 wrote:
Sat Nov 17, 2018 10:37 pm
The DFA/Swedroe 'rule' with CDs is to keep extending the maturity until the point where adding one additional year would result in additional yield of under .2% (20 basis points).
That rule was published is his bond book back before the financial crisis. Does any one know if has been revised since then? I haven't been able to find anything.
There is no fundamental reason for such a rule to hold. It is just what he thought was reasonable back then, given the information available then.

But common sense applies.

Clearly, the market overall is paying *ONLY 9 bps (0.09%) higher for the 5yr Treasury vs the 2yr Treasury. And paying around 0.1 - 0.15% more for the then 10Yr vs 5Yr. So all of those investors, including institutions, are actively NOT using his advice.

I personally think that a 3 bps (0.03%) yield premium per year of duration (which is currently the case for the US Treasury from 2Yr to 10Yr) is not worth it.

Buy the 2Yrs, and keep rolling.
Last edited by AlphaLess on Sun Nov 18, 2018 3:59 pm, edited 1 time in total.
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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Sun Nov 18, 2018 3:57 pm

AlphaLess wrote:
Sun Nov 18, 2018 3:35 pm
Doc wrote:
Sun Nov 18, 2018 9:23 am
willthrill81 wrote:
Sat Nov 17, 2018 10:37 pm
The DFA/Swedroe 'rule' with CDs is to keep extending the maturity until the point where adding one additional year would result in additional yield of under .2% (20 basis points).
That rule was published is his bond book back before the financial crisis. Does any one know if has been revised since then? I haven't been able to find anything.
There is no fundamental reason for such a role to hold. It is just what he thought was reasonable back then, given the information available then.
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Sun Nov 18, 2018 3:59 pm

willthrill81 wrote:
Sun Nov 18, 2018 3:57 pm
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
Typical marketing material.

'Rule-of-thumb'. LOL.
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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Sun Nov 18, 2018 4:11 pm

AlphaLess wrote:
Sun Nov 18, 2018 3:59 pm
willthrill81 wrote:
Sun Nov 18, 2018 3:57 pm
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
Typical marketing material.

'Rule-of-thumb'. LOL.
What's being promoted? Larry doesn't sell CDs.

Do you have a problem with rules-of-thumb?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why do people think CD rates will keep going up?

Post by Doc » Sun Nov 18, 2018 4:33 pm

willthrill81 wrote:
Sun Nov 18, 2018 3:57 pm
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
Thanks will. That's the most recent Larry quote I gave seen on the subject.

A quick look makes me think that the 20 bps has disappeared for anything longer than about 5 years after 2016.

Image

This is a roll yield chart which includes both coupon and capital gains considerations in the return. (Or a zero coupon bond model viewpoint.) I haven't updated it for the last Fed Open Market meeting.
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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Sun Nov 18, 2018 4:34 pm

willthrill81 wrote:
Sun Nov 18, 2018 4:11 pm
AlphaLess wrote:
Sun Nov 18, 2018 3:59 pm
willthrill81 wrote:
Sun Nov 18, 2018 3:57 pm
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
Typical marketing material.

'Rule-of-thumb'. LOL.
What's being promoted? Larry doesn't sell CDs.

Do you have a problem with rules-of-thumb?
I have a problem with anything that is not based on extensive data analysis or mathematical proofs.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Sun Nov 18, 2018 4:35 pm

AlphaLess wrote:
Sun Nov 18, 2018 4:34 pm
willthrill81 wrote:
Sun Nov 18, 2018 4:11 pm
AlphaLess wrote:
Sun Nov 18, 2018 3:59 pm
willthrill81 wrote:
Sun Nov 18, 2018 3:57 pm
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
Typical marketing material.

'Rule-of-thumb'. LOL.
What's being promoted? Larry doesn't sell CDs.

Do you have a problem with rules-of-thumb?
I have a problem with anything that is not based on extensive data analysis or mathematical proofs.
How do you know that DFA didn't conduct extensive data analysis when they devised this rule (Larry didn't come up with this; he merely promoted it)? And there are exceedingly few mathematical proofs in the world of investing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Sun Nov 18, 2018 5:02 pm

willthrill81 wrote:
Sun Nov 18, 2018 4:35 pm
How do you know that DFA didn't conduct extensive data analysis when they devised this rule (Larry didn't come up with this; he merely promoted it)? And there are exceedingly few mathematical proofs in the world of investing.
I am not the one promoting the rule.

I would expect that the party promoting would have the onus to present the extensive analysis done by them or their allies.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Why do people think CD rates will keep going up?

Post by catalina355 » Sun Nov 18, 2018 5:05 pm

AlphaLess wrote:
Sun Nov 18, 2018 4:34 pm
willthrill81 wrote:
Sun Nov 18, 2018 4:11 pm
AlphaLess wrote:
Sun Nov 18, 2018 3:59 pm
willthrill81 wrote:
Sun Nov 18, 2018 3:57 pm
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
Typical marketing material.

'Rule-of-thumb'. LOL.
What's being promoted? Larry doesn't sell CDs.

Do you have a problem with rules-of-thumb?
I have a problem with anything that is not based on extensive data analysis or mathematical proofs.
What approach would you suggest for deciding whether to extend duration for a bond investment?

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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Sun Nov 18, 2018 5:43 pm

catalina355 wrote:
Sun Nov 18, 2018 5:05 pm
AlphaLess wrote:
Sun Nov 18, 2018 4:34 pm
willthrill81 wrote:
Sun Nov 18, 2018 4:11 pm
AlphaLess wrote:
Sun Nov 18, 2018 3:59 pm
willthrill81 wrote:
Sun Nov 18, 2018 3:57 pm
Larry discussed the issue in this thread years ago, as did many others. It's just a rule-of-thumb, not a hard-and-fast rule.
Typical marketing material.

'Rule-of-thumb'. LOL.
What's being promoted? Larry doesn't sell CDs.

Do you have a problem with rules-of-thumb?
I have a problem with anything that is not based on extensive data analysis or mathematical proofs.
What approach would you suggest for deciding whether to extend duration for a bond investment?
If trading and taxes are not an issue, you always invest at the steepest part of the curve.
That needs a lot more precision, I know.
But currently 2Yr is at that sweet spot (as anything beyond that gets something like 2-3 bps of additional yield premium per year of duration).
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Why do people think CD rates will keep going up?

Post by sport » Sun Nov 18, 2018 5:49 pm

If you have a CD ladder, there is another consideration when selecting the term for a new CD. You might want to buy a CD that fits into the existing ladder so that you do not have two of them maturing at the same time.

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catalina355
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Re: Why do people think CD rates will keep going up?

Post by catalina355 » Sun Nov 18, 2018 6:54 pm

AlphaLess wrote:
Sun Nov 18, 2018 5:43 pm
catalina355 wrote:
Sun Nov 18, 2018 5:05 pm
AlphaLess wrote:
Sun Nov 18, 2018 4:34 pm
willthrill81 wrote:
Sun Nov 18, 2018 4:11 pm
AlphaLess wrote:
Sun Nov 18, 2018 3:59 pm


Typical marketing material.

'Rule-of-thumb'. LOL.
What's being promoted? Larry doesn't sell CDs.

Do you have a problem with rules-of-thumb?
I have a problem with anything that is not based on extensive data analysis or mathematical proofs.
What approach would you suggest for deciding whether to extend duration for a bond investment?
If trading and taxes are not an issue, you always invest at the steepest part of the curve.
That needs a lot more precision, I know.
But currently 2Yr is at that sweet spot (as anything beyond that gets something like 2-3 bps of additional yield premium per year of duration).
I agree with you. That's a rule of thumb. So using Larry's rule of thumb is quite a reasonable approach.

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Doc
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Re: Why do people think CD rates will keep going up?

Post by Doc » Sun Nov 18, 2018 8:13 pm

AlphaLess wrote:
Sun Nov 18, 2018 5:43 pm
But currently 2Yr is at that sweet spot (as anything beyond that gets something like 2-3 bps of additional yield premium per year of duration).
This is the question that I have been trying to get an answer to for the last few years. The 20 bps per year made sense in 2007 (?) when Swedroe published his bond book. It still appeared to make sense in 2016. Swedroe referred to DFA as his (unpublished) source. Does it still make sense today? It's a "rule of thumb ". From the graph I presented earlier it was still applicable in 2016. In 2017 not so much. The shape of the yield curve has changed do the financial crisis and subsequent Fed action.

Sith happens. We all have to live with it.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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willthrill81
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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Sun Nov 18, 2018 8:18 pm

Doc wrote:
Sun Nov 18, 2018 8:13 pm
AlphaLess wrote:
Sun Nov 18, 2018 5:43 pm
But currently 2Yr is at that sweet spot (as anything beyond that gets something like 2-3 bps of additional yield premium per year of duration).
This is the question that I have been trying to get an answer to for the last few years. The 20 bps per year made sense in 2007 (?) when Swedroe published his bond book. It still appeared to make sense in 2016. Swedroe referred to DFA as his (unpublished) source. Does it still make sense today? It's a "rule of thumb ". From the graph I presented earlier it was still applicable in 2016. In 2017 not so much. The shape of the yield curve has changed do the financial crisis and subsequent Fed action.

Sith happens. We all have to live with it.
If it made sense at one point in time, why would it not make sense today? Yes, the yield curve changes, but that's why such rules-of-thumb are useful; they provide guidance under a broad array of possibilities.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Austintatious
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Re: Why do people think CD rates will keep going up?

Post by Austintatious » Sun Nov 18, 2018 8:51 pm

fortfun wrote:
Sun Nov 18, 2018 12:33 pm
sport wrote:
Sun Nov 18, 2018 12:24 pm
fortfun wrote:
Sun Nov 18, 2018 12:21 pm
I'm just not sure that 50k will be worth 60k in 5 years, in the stock market (could be more, could be less).
Since CDs are yielding more than your mortgage rate, you could put the money into CDs and not be concerned about the stock market.
Thanks Sport. Yes, that's what I was thinking. In five years, I'd re-assess the best use of the 50k + 10k interest and decide whether or not to pay off the mortgage.
fortfun, that very safe and guaranteed 4% for 5 years offer is just about as good as you'll find right now. If I had 50k that I wanted to put somewhere safe for a few years that I planned to use to retire the mortgage as I went into retirement, I'd jump at that opportunity. And if rates were to go up as I and some others think likely, I still wouldn't regret for a moment having made the move. Looks like that'd make a bit under $11k earned over the 5 years, and your principal will be there just as planned. Sweet.

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Doc
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Re: Why do people think CD rates will keep going up?

Post by Doc » Sun Nov 18, 2018 9:13 pm

willthrill81 wrote:
Sun Nov 18, 2018 8:18 pm
If it made sense at one point in time, why would it not make sense today? Yes, the yield curve changes, but that's why such rules-of-thumb are useful; they provide guidance under a broad array of possibilities.
The world changes. Just last year I sold my horse. Next year we may only have Uber. :wink:

All I've been trying to do is to get Larry to update his recommendation. Maybe I should stop by his house and petition him. :)

(My location. Two left turns from Larry's.)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

venkman
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Re: Why do people think CD rates will keep going up?

Post by venkman » Mon Nov 19, 2018 1:04 am

AlphaLess wrote:
Sun Nov 18, 2018 5:43 pm
If trading and taxes are not an issue, you always invest at the steepest part of the curve.
That needs a lot more precision, I know.
But currently 2Yr is at that sweet spot (as anything beyond that gets something like 2-3 bps of additional yield premium per year of duration).
2 years is the sweet spot if you're talking about duration risk and return. It's not necessarily the sweet spot if you factor in reinvestment risk. The people who are only getting a few extra bps for their 5- and 10-year bonds are also getting a longer period of protection against a recession and the resulting drop in interest rates.

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willthrill81
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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Mon Nov 19, 2018 1:15 am

venkman wrote:
Mon Nov 19, 2018 1:04 am
AlphaLess wrote:
Sun Nov 18, 2018 5:43 pm
If trading and taxes are not an issue, you always invest at the steepest part of the curve.
That needs a lot more precision, I know.
But currently 2Yr is at that sweet spot (as anything beyond that gets something like 2-3 bps of additional yield premium per year of duration).
2 years is the sweet spot if you're talking about duration risk and return. It's not necessarily the sweet spot if you factor in reinvestment risk. The people who are only getting a few extra bps for their 5- and 10-year bonds are also getting a longer period of protection against a recession and the resulting drop in interest rates.
They are also exposing themselves to greater interest rate risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

ivk5
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Re: Why do people think CD rates will keep going up?

Post by ivk5 » Mon Nov 19, 2018 6:22 am

Dollars are fungible of course, but I would look at this as a liability driven investment and buy duration that matches the timing of the liability, regardless of term premium and yield curve.

It’s unclear from the thread but my impression is that it’s a guaranteed loss vs paying off today (considering taxes), but preserves liquidity if that’s what OP wants.

neoptolemus412
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Re: Why do people think CD rates will keep going up?

Post by neoptolemus412 » Mon Nov 19, 2018 6:44 am

There's been alot of good analysis, but I would offer that CDs are a total different type of investment than most fixed income out there. This is all US based, so may differ intl depending upon the market.

1) CDs are really deposits at the end of the day. They are FDIC insured and a intermediate term funding source for most banks/institutions. Brokered CDs are a bit of a different animal, but interest rate concerns work much of the same way for deposits. Especially, if one plans to hold the CD until maturity.

2) CDs are tied directly to US interest rates. Similar to most rates offered by banks, if the Fed moves rates up or down, that directly impacts the bank's ability to borrow and lend. Deposits are the lowest cost liability a bank can take on to fund operations. Thus, the Fed rate goes up, the bank's expenses increase as it pays higher interest for funds, and they pass the increases on to lending customers. In turn, the bank's all want cheap deposits, so a competition for new deposits brews. In the last 10 years, such competition has been lackluster as rates were set at 0. Now, it's starting again in full force.

3) Competition for Deposits. Other fixed income offerings do not have the market forces driving their offerings that CDs do. Banks offer all sorts of interest and customer focused incentives to win over customers shopping for CDs. Today, there are a lot of 'online only' banks and customer focused institutions that have very little overhead. CDs are a perfect product for them as it requires minimal customer service once setup and the CD is redeemed. I firmly believe most increases are happening quickly as these online banks move at lightening speed, for a bank. A customer can good CDs and see the best deal. This plays alot into CD rates going up quicker than usual once the Fed announces a rate hike.

balbrec2
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Re: Why do people think CD rates will keep going up?

Post by balbrec2 » Mon Nov 19, 2018 9:07 am

Recency bias. Many investors expect that what has been happening, to
continue to happen. Sometimes it does.

Turbo29
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Re: Why do people think CD rates will keep going up?

Post by Turbo29 » Mon Nov 19, 2018 12:03 pm

Interesting regarding bank competition. For a while the best brokered CDs were from Wells Fargo. I can only assume that was because they were having trouble attracting cheaper funds through their branches due to the scandal they underwent.

Right now on the Ally website I see 3yr CDs offering 2.6% (<$5000), 2.70% ($5000 to $24999), and 2.75% (=>$25000). Yet on Etrade right now Ally is offering brokered 3yr CDs at 3.25% (minimum 1CD $1000). Why would there be such a difference? Only thing I can think of is that they will never have early withdrawals of brokered CDs so they are guaranteed to have the use of the money for 3 years. is that worth 0.50% to them?

neoptolemus412
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Re: Why do people think CD rates will keep going up?

Post by neoptolemus412 » Mon Nov 19, 2018 9:55 pm

Turbo29 wrote:
Mon Nov 19, 2018 12:03 pm
Interesting regarding bank competition. For a while the best brokered CDs were from Wells Fargo. I can only assume that was because they were having trouble attracting cheaper funds through their branches due to the scandal they underwent.

Right now on the Ally website I see 3yr CDs offering 2.6% (<$5000), 2.70% ($5000 to $24999), and 2.75% (=>$25000). Yet on Etrade right now Ally is offering brokered 3yr CDs at 3.25% (minimum 1CD $1000). Why would there be such a difference? Only thing I can think of is that they will never have early withdrawals of brokered CDs so they are guaranteed to have the use of the money for 3 years. is that worth 0.50% to them?
Brokered deposits are a bit of a different beast, but the same in principle. The deposits come in much larger denomination than a traditional CD sold to retail customers. Banks can take in millions of dollars on 1 brokered deposit. The brokers slice it up and sell them to their customers, but the orders are magnitudes larger than retail CDs.

As far as interest paid to holders of the brokered CD, the banks offer more attractive interest rates for a few reasons. 1) banks can obtain much larger guaranteed deposits from a brokered deposit product as the broker has to guarantee a minimum purchase up front, 2) the broker usually has a sales channel to push the CDs out to the market to institutional investors that buy brokered CDs in large lots and, 3) brokered CDs trade similar to fixed income securities. In short, #1 is the main driver of higher interest rates. The operational costs are much lower on the bank's end, so they pass it on to customers.

As a side bar, many banks have failed due to their miscalculation of taking in brokered deposits to fund their lending operations. The FDIC has special rules for brokered deposits and banks that are in this business need to be "well funded". If the bank is well capitalized, they can lend. If not well funded, the FDIC does not allow banks to offer this product. There's a white paper on the topic and its something industry/FDIC constantly bicker about back and forth as so many banks have fallen in love with these products, then when a recession hits and commercial real estate developers don't make payments on their notes, the banks can't make the interest payments. Any rate, brokered deposits can take up a large chunk of a bank's deposit base.

AlphaLess
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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Mon Nov 19, 2018 10:27 pm

venkman wrote:
Mon Nov 19, 2018 1:04 am
AlphaLess wrote:
Sun Nov 18, 2018 5:43 pm
If trading and taxes are not an issue, you always invest at the steepest part of the curve.
That needs a lot more precision, I know.
But currently 2Yr is at that sweet spot (as anything beyond that gets something like 2-3 bps of additional yield premium per year of duration).
2 years is the sweet spot if you're talking about duration risk and return. It's not necessarily the sweet spot if you factor in reinvestment risk. The people who are only getting a few extra bps for their 5- and 10-year bonds are also getting a longer period of protection against a recession and the resulting drop in interest rates.
Yes, but they are not necessarily buying the 5-year or 10-year because of that.

They might be buying the 5-year or 10-year because they need to duration match.
"You can get more with a kind word and a gun than with just a kind word." George Washington

venkman
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Re: Why do people think CD rates will keep going up?

Post by venkman » Mon Nov 19, 2018 11:07 pm

AlphaLess wrote:
Mon Nov 19, 2018 10:27 pm
venkman wrote:
Mon Nov 19, 2018 1:04 am
2 years is the sweet spot if you're talking about duration risk and return. It's not necessarily the sweet spot if you factor in reinvestment risk. The people who are only getting a few extra bps for their 5- and 10-year bonds are also getting a longer period of protection against a recession and the resulting drop in interest rates.
Yes, but they are not necessarily buying the 5-year or 10-year because of that.

They might be buying the 5-year or 10-year because they need to duration match.
If they had a 10-year horizon, and 2-year notes are currently the best deal in terms of risk/reward, why wouldn't they just roll over 2-year notes for 10 years? Or at least buy a 2-year now, then reevaluate when it matures?

Duration risk goes both ways, and the yield curve is relatively flat right now because a lot of people are expecting increased duration risk to work in their favor. I'm not saying they're right or wrong, just that markets are efficient, and there's a reason that 2-year notes are relatively less in demand than other maturities.

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Re: Why do people think CD rates will keep going up?

Post by AlphaLess » Mon Nov 19, 2018 11:10 pm

venkman wrote:
Mon Nov 19, 2018 11:07 pm
I'm not saying they're right or wrong, just that markets are efficient, and there's a reason that 2-year notes are relatively less in demand than other maturities.
I agree that markets are efficient.

That is why saying that 'ONLY buy longer maturity if you are compensated 20 bps per year' is a SILLY idea.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Why do people think CD rates will keep going up?

Post by willthrill81 » Mon Nov 19, 2018 11:42 pm

AlphaLess wrote:
Mon Nov 19, 2018 11:10 pm
That is why saying that 'ONLY buy longer maturity if you are compensated 20 bps per year' is a SILLY idea.
Do you have empirical evidence to support that view?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

ivk5
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Re: Why do people think CD rates will keep going up?

Post by ivk5 » Tue Nov 20, 2018 3:09 am

venkman wrote:
Mon Nov 19, 2018 11:07 pm
AlphaLess wrote:
Mon Nov 19, 2018 10:27 pm
venkman wrote:
Mon Nov 19, 2018 1:04 am
2 years is the sweet spot if you're talking about duration risk and return. It's not necessarily the sweet spot if you factor in reinvestment risk. The people who are only getting a few extra bps for their 5- and 10-year bonds are also getting a longer period of protection against a recession and the resulting drop in interest rates.
Yes, but they are not necessarily buying the 5-year or 10-year because of that.

They might be buying the 5-year or 10-year because they need to duration match.
If they had a 10-year horizon, and 2-year notes are currently the best deal in terms of risk/reward, why wouldn't they just roll over 2-year notes for 10 years? Or at least buy a 2-year now, then reevaluate when it matures?
Reinvestment risk.

A liability is like a negative bond. If buying a bond to fund a liability, anything other than equivalent duration is a bet. Many folks are betting on future interest rate / yield curve changes without understanding or intent.

Remember for OP this is a mortgage payoff fund do known definite liability.

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