MikeG62 wrote: ↑Fri Apr 20, 2018 7:05 am
BlackcatCA wrote: ↑Thu Apr 19, 2018 4:50 pm
...Personally I wouldn't buy CDs in this rising rate environment: there will be 2 or maybe 3 Fed rate increases this year so expect CD rates to rise further.
+1
I'd try and stick to no penalty CD's for this reason (for the next couple of years), unless you come upon an extraordinary deal.
First, it's already been pointed out that Ally no-penalty CD is no longer competitive--you can do better in money market fund or savings account at another bank.
Next, it's important to understand changes in the 2-year and 3-year (and longer) CD rates do not track changes in the federal funds rate. Even Treasuries of maturities beyond a few months don't track changes in the FFR. The FFR is an overnight rate, so only the shortest-term Treasuries track changes in it. It's easy to find periods when the FFR increased a lot, but intermediate-term Treasuries did not. And CDs march somewhat to their own drummer, so even more disconnected from FFR.
Just because bond yields have been rising does not mean that they will continue to rise. It's well established that even economists are poor at predicting changes in interest rates, so why should we think we're any better at it?
In retrospect, we probably would have been better off in savings accounts or money market funds or no-penalty CDs than in short-term or intermediate-term taxable bond funds over the last year. Interestingly, long-term bond funds have done relatively well over the last year (but YTD have not). Also interestingly, intermediate-term and long-term muni bond funds have done relatively well over the last year.
https://investor.vanguard.com/mutual-fu ... nd-returns
(You can filter to just see the bond funds).
All of this goes to show that returns of different types of bonds and different maturities can be quite different, so to peg your expected bond returns to the expected increases in FFR is not rational.
If you can predict interest rates or yields of specific fixed-income securities, then you can make a ton of money through a combination of short and long positions, perhaps in futures or options, rather than just keeping it in a low-yield no-penalty CD. Good luck with that.
I think the best we can do is evaluate yield curves and relative yield premiums (TEY if in taxable), and pick the fixed-income securities that seem to offer the best risk-adjusted expected returns. Most people probably are better off just sticking off with a bond fund in a 3-fund portfolio, and keeping their "cash" in the highest yielding fixed-income option with no term risk, or if they prefer simplicity, just sticking with their bank or MM fund of choice.
Kevin
If I make a calculation error, #Cruncher probably will let me know.