Timing CD Renewal

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sport
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Timing CD Renewal

Post by sport »

I have a CD in my ladder that matures in two weeks that I am planning to renew for another 6 years. Yesterday, my bank had an APY of 5.1% for this term. I am concerned that if I wait another two weeks, interest rates will fall and I will not be able to get this rate. This is especially true with the Fed talking about another rate cut.

So, I purchased another CD for the same amount yesterday with additional money. When the old CD matures in two weeks, I can replace the money I used to buy the new one. In this way, I was able to effectively get the current rate on my renewal, and have it locked in for the next 6 years.

I know that this is a little market timing in the CD market, but I cannot see rates increasing in the next two weeks, and they certainly may decrease. Since I am satisfied with the current rate, I do not wish to risk the rate falling just before I need to make another commitment. I believe that in this instance, market timing is prudent. On Dec. 15, we will know how well this stategy has worked.

Jeff
g koz
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Post by g koz »

Jeff,

On Dec. 11, the Fed. Reserve is expected to lower the Federal Funds Rate by at least .25%, banks and credit unions realize this and most have already gotten conservative with the interest rates they offer. If you like the 5.1% APY for 6 years, then why not, lock in this rate. 6 years is somewhat a long time to not be able to access your money without penalty, so you want to get as high a rate as you can. We seem to be in a declining interest rate environment due to troubles in the housing and credit markets, so I don't see your decision as foolish, especially if you do not like risk and wish to be very conservative. Hopefully, your tax situation is such that you aren't significantly affected by taxes owed on the interest, or you have the CD in a tax-advantaged account like an IRA.

gkoz
Topic Author
sport
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Re: Timing CD Renewal

Post by sport »

jsl11 wrote: I know that this is a little market timing in the CD market, but I cannot see rates increasing in the next two weeks, and they certainly may decrease. Since I am satisfied with the current rate, I do not wish to risk the rate falling just before I need to make another commitment. I believe that in this instance, market timing is prudent. On Dec. 15, we will know how well this stategy has worked.

Jeff
Well, the two weeks has passed, and the bank's rate for a 6-year CD has indeed fallen to a 4.75% APY. By doing a little (gasp!) market timing, I have a rate that is 35 basis points higher, locked in for 6 years. I suggest that in certain instances, market timing can be worthwhile.

Best wishes,
Jeff
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baw703916
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Post by baw703916 »

Congrats! And I agree with you, timing CD rates is doable and profitable. I loaded up on CDs a few months when all the subprime fallout hit, and it was pretty clear that interest rates and CD rates were going to drop.

Best wishes,
Brad
Most of my posts assume no behavioral errors.
livesoft
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Post by livesoft »

Isn't that counting your chickens before they hatch? What if rates go up to 8% next year?
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mephistophles
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I DON'T KNOW

Post by mephistophles »

I don't consider buying CD's as market timeing. Moving money around in FDIC savings, checking, or other guaranteed accounts is just common sense.

That being said, I recently got 6% from Pentagon FCU for a three year term and probably you could have gotten a higher rate with them also.

And, as mentioned above, market rates for other fixed investments may go higher than the 5.1% you are locked in on for six years.
Topic Author
sport
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Location: Cleveland, OH

Post by sport »

livesoft wrote:Isn't that counting your chickens before they hatch? What if rates go up to 8% next year?
livesoft,
The CD is part of a ladder and I was ready to purchase a 6-year CD when the old one matured. I would be tied up for 6 years in either case. I would rather be locked in for 5.1% than 4.75%. If rates go up next year, I have another CD maturing at that time to take advantage of it.

Best wishes,
Jeff
Topic Author
sport
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Location: Cleveland, OH

Re: I DON'T KNOW

Post by sport »

mephistophles wrote:I don't consider buying CD's as market timeing. Moving money around in FDIC savings, checking, or other guaranteed accounts is just common sense.
meph,
If I had waited for my old CD to mature, I would have renewed it at 4.75%. By anticipating the interest rate drop and buying a replacement CD two weeks earlier, I gained 35 basis points. That is certainly market timing. Most of the time, it is not so apparent what interest rates are going to do. However, under these specific circumstances, it was doable.

Best wishes,
Jeff
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mephistophles
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Hello Jeff

Post by mephistophles »

Guess I always thought of market timing in terms of losing principle in the equity markets but now that I think about it I see your point.

Do check out Pentagon Federal Credit Union. Anybody can join and once or twice a year they offer special CD rates. I expect a new offer in January. These are higher than their regularly posted rates.

Regards,

ole meph
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