2-year CDs at Vanguard and Fidelity Today

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
uberme
Posts: 37
Joined: Wed Aug 12, 2015 3:17 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by uberme » Fri Aug 10, 2018 9:48 am

Dumb question- do you guys prefer one over another in terms of New Issues or Secondary Issues (@ Fidelity)?
Haven't ever purchased a CD through a broker but looking to do so soon

User avatar
jeffyscott
Posts: 7083
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: 2-year CDs at Vanguard and Fidelity Today

Post by jeffyscott » Fri Aug 10, 2018 9:56 am

Usually can get a little better net yield on secondary. You do have to adjust the YTM in secondary listings at Fidelity for the $1/$1000 commission, though. Secondary also can settle sooner (2 days), the new issues settle on whatever date is listed and that can be a week or more in some cases.
press on, regardless - John C. Bogle

likashing
Posts: 136
Joined: Tue Mar 06, 2007 7:58 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by likashing » Fri Aug 10, 2018 10:27 am

Accidentally bought a 01/06/2021 maturity @ 105.042 for 3.025978% effective yield. So it matures in 2.4 years. I read that FDIC only covers up to par. It is Transportation Alliance Bank. Deposit accounts show B+... Safe and Sound shows 5

Do you guys avoid buying above par?

https://www.depositaccounts.com/banks/tab-bank.html

protagonist
Posts: 5320
Joined: Sun Dec 26, 2010 12:47 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Fri Aug 10, 2018 4:30 pm

1% difference means $100/year for 2-3 years per $10K invested. 0.1% is $10/year.
So unless you are investing large amounts in any given CD, differences of a few tenths of a percent are trivial. A few cups of coffee per year in a NYC coffee house.

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Fri Aug 10, 2018 8:04 pm

likashing wrote:
Fri Aug 10, 2018 10:27 am
Accidentally bought a 01/06/2021 maturity @ 105.042 for 3.025978% effective yield. So it matures in 2.4 years. I read that FDIC only covers up to par. It is Transportation Alliance Bank. Deposit accounts show B+... Safe and Sound shows 5

Do you guys avoid buying above par?

https://www.depositaccounts.com/banks/tab-bank.html
Yes, I avoid buying above par. I bought a CD above par issued by a bank that failed not too long after I bought it, so I lost the amount above par. Fortunately it was a small amount of money, but lesson learned (many years ago).

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

protagonist
Posts: 5320
Joined: Sun Dec 26, 2010 12:47 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Fri Aug 10, 2018 9:37 pm

Kevin M wrote:
Fri Aug 10, 2018 8:04 pm
likashing wrote:
Fri Aug 10, 2018 10:27 am
Accidentally bought a 01/06/2021 maturity @ 105.042 for 3.025978% effective yield. So it matures in 2.4 years. I read that FDIC only covers up to par. It is Transportation Alliance Bank. Deposit accounts show B+... Safe and Sound shows 5

Do you guys avoid buying above par?

https://www.depositaccounts.com/banks/tab-bank.html
Yes, I avoid buying above par. I bought a CD above par issued by a bank that failed not too long after I bought it, so I lost the amount above par. Fortunately it was a small amount of money, but lesson learned (many years ago).

Kevin
Is the opposite true? If you buy below par will FDIC reimburse you 100% of par? I would think so.

stlutz
Posts: 4606
Joined: Fri Jan 02, 2009 1:08 am

Re: 2-year CDs at Vanguard and Fidelity Today

Post by stlutz » Fri Aug 10, 2018 10:38 pm

Do you guys avoid buying above par?
I set aside my hangup over buying a premium CD once I experienced CDs I was holding going up in price and becoming premium CDs. You buy your portfolio every day. If I would hold a CD that I bought for a 100 that is now trading at 102, there is no reason I shouldn't be willing to buy a new one at 102 today. If I wasn't, then I should sell the existing CD I have.

gips
Posts: 438
Joined: Mon May 13, 2013 5:42 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by gips » Sat Aug 11, 2018 8:40 am

Kevin M wrote:
Thu Aug 09, 2018 12:26 pm
gips wrote:
Wed Aug 08, 2018 8:35 pm
indeed, this week, just before we funded the justice fcu 24-month %3.354 cd along comes the freedom fcu 30-month %3.56 offer. we changed gears, and hope to have that funded tomorrow. still, as I look at some of the low rates in our cd ladder (1.4%, 2%, etc), I wonder, even with the loss of principal in the face of rising interest rates, if BND might have offered a better return. I suppose I should figure that out...
Whenever you bought your CDs, the Treasuries in BND were yielding about the same or less for the same maturities (if not, you should have bought individual Treasuries instead of the CDs). Both BND and the CDs you bought have experienced losses, but the BND losses probably are larger, considering the duration of about 6 years.

The 2-year CDs you are buying now have yields much higher than the 2-year Treasuries held by BND--especially if the state income tax exemption for Treasuries is not a factor for you. If you want to take much more term risk, as you would be doing with BND, you can buy longer-maturity CDs, and earn even larger yield premiums--at least looking at brokered CDs. But the 2-year CD you bought at 3.35% has the yield of a 5-year brokered CD, which is significantly higher than the 5-year Treasury yield at about 2.8%, which is what BND would be holding. A 10-year brokered CD yields 3.75% compared to about 2.9% for the 10-year Treasury BND would be holding.

Kevin
thanks kevin, that's a good way of looking at it. so if that's the case, why would one ever purchase BND over CD/treasuries (other than simplicity)? Perhaps exposure to securities with higher credit risk and accordant higher rates?

In any case, I continue to believe interest rates will increase, bond funds will shed principal and the cd market is not as efficient as the broader equity or fixed income market.

gips
Posts: 438
Joined: Mon May 13, 2013 5:42 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by gips » Sat Aug 11, 2018 8:47 am

protagonist wrote:
Fri Aug 10, 2018 9:37 pm

Is the opposite true? If you buy below par will FDIC reimburse you 100% of par? I would think so.
well there's an interesting thought! purchase secondary cds far below par from banks that may fail.

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Aug 11, 2018 12:41 pm

gips wrote:
Sat Aug 11, 2018 8:40 am
thanks kevin, that's a good way of looking at it. so if that's the case, why would one ever purchase BND over CD/treasuries (other than simplicity)? Perhaps exposure to securities with higher credit risk and accordant higher rates?
I personally don't hold BND or equivalents, since I usually can earn higher yields with CDs than on many of the BND Treasury holdings, I can get exposure to credit risk with a corporate or investment-grade fund with no or much less Treasuries, and I can hold individual Treasuries or Treasury funds to target the Treasury maturities I'm interested in (currently 2-year maturity or less in taxable accounts).

Reasons for others to hold BND or an equivalent are simplicity, lack of access to good alternatives (e.g., in a 401k), or just that holding something close to the total US bond market (with notable exceptions) is one's preference.
In any case, I continue to believe interest rates will increase, bond funds will shed principal and the cd market is not as efficient as the broader equity or fixed income market.
If you believe rates in general will increase, then sticking with shorter-term maturities makes sense. I have little confidence in my ability to predict future interest rates, since no one seems to be very good at it, but am sticking with shorter-term fixed-income with new cash due to the shape of the yield curve, and the desire to be adequately compensated for taking term risk.

I don't know if the term "not as efficient" is quite right, but clearly CDs sometimes offer significant yield premiums over Treasuries of same maturities, so can be a good deal for retail investors who can take advantage of the FDIC/NCUA deposit insurance. However, currently Treasuries are competitive with brokered CDs in an IRA out to 1-year maturity, and for me in a taxable account out to 3-year maturity, but this doesn't include the best direct CD deals that seem to be popping up more now.

Still, we've essentially lost money on CDs we bought a few months ago, just as we've lost money on bond fund shares we bought a few months ago, but not as much if we kept CD maturities shorter than the average maturity/duration of whatever bond fund we're comparing to.

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

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Aug 11, 2018 1:04 pm

stlutz wrote:
Fri Aug 10, 2018 10:38 pm
I set aside my hangup over buying a premium CD once I experienced CDs I was holding going up in price and becoming premium CDs. You buy your portfolio every day. If I would hold a CD that I bought for a 100 that is now trading at 102, there is no reason I shouldn't be willing to buy a new one at 102 today. If I wasn't, then I should sell the existing CD I have.
It's a good point, but one difference is that it very well could cost you 1-2% in bid/ask spread to sell your CD, so there is a bit of a difference between buying at 102 ask and selling at 102 bid.

I'd refine my answer a bit to say that if you buy at a premium, perhaps do a bit more due diligence regarding the bank's financial health. In my case, I didn't do that, and bought a CD issued by a bank that was obviously at risk.

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

sport
Posts: 7038
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: 2-year CDs at Vanguard and Fidelity Today

Post by sport » Sat Aug 11, 2018 1:58 pm

Kevin,
A related question: When you buy brokered CDs, do you care about which bank issued them? When looking at the offerings, I see a lot of US subsidiaries of foreign banks, and a number of smaller or newer domestic banking companies. I am aware that they are all FDIC insured. Nevertheless, are you just as comfortable with a bank owned by a company in Spain, Japan, France, Israel, Venezuela, etc. as you are with Citibank, or Morgan Stanley, or Wells Fargo?

I also note that a lot of larger US banks do not seem to be using brokered CDs. In my area there are Huntington Banks, PNC Banks, US Banks. It seems that these banks are able to obtain all the money they need locally. What does this say, if anything, about the banks that need to go to brokers to get the deposits they need? Does this mean anything, and is it important?

Thanks for your insight.

stlutz
Posts: 4606
Joined: Fri Jan 02, 2009 1:08 am

Re: 2-year CDs at Vanguard and Fidelity Today

Post by stlutz » Sat Aug 11, 2018 4:05 pm

I'd refine my answer a bit to say that if you buy at a premium, perhaps do a bit more due diligence regarding the bank's financial health. In my case, I didn't do that, and bought a CD issued by a bank that was obviously at risk.
+1.

And I should say that I always buy the lowest priced CD all other things being equal. The other [small] advantage to discount ones is that you can defer the taxes on the market discount income until maturity.

Right now there are a lot of discount CDs out there. I've also bought at times when there weren't.

likashing
Posts: 136
Joined: Tue Mar 06, 2007 7:58 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by likashing » Sat Aug 11, 2018 4:32 pm

stlutz wrote:
Sat Aug 11, 2018 4:05 pm
I'd refine my answer a bit to say that if you buy at a premium, perhaps do a bit more due diligence regarding the bank's financial health. In my case, I didn't do that, and bought a CD issued by a bank that was obviously at risk.
+1.

And I should say that I always buy the lowest priced CD all other things being equal. The other [small] advantage to discount ones is that you can defer the taxes on the market discount income until maturity.

Right now there are a lot of discount CDs out there. I've also bought at times when there weren't.
All great points. Thanks Kevin and stlutz.

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Aug 11, 2018 8:59 pm

sport wrote:
Sat Aug 11, 2018 1:58 pm
Kevin,
A related question: When you buy brokered CDs, do you care about which bank issued them? When looking at the offerings, I see a lot of US subsidiaries of foreign banks, and a number of smaller or newer domestic banking companies. I am aware that they are all FDIC insured. Nevertheless, are you just as comfortable with a bank owned by a company in Spain, Japan, France, Israel, Venezuela, etc. as you are with Citibank, or Morgan Stanley, or Wells Fargo?
For whatever reason, the best secondary CD deals I was finding when I was last actively buying were almost all from big-name US banks, so I really didn't pay much attention to the bank, other than with respect to FDIC insurance limits. Since I've bought most of my brokered CDs in IRAs, there's no way around the $250K limit, as there is in taxable accounts. And you must combine direct CDs with brokered CDs with respect to FDIC coverage, so that's something I pay attention to.

Having said that, I don't think I'd worry much about the bank as long as it's FDIC insured, and I don't think Vanguard or Fidelity offer any CDs that aren't (I've never seen any). Again, the exception would be if paying a significant premium over par, in which case it's probably prudent to take a closer look. All the secondary CDs I bought since late last year were purchased at a discount.
I also note that a lot of larger US banks do not seem to be using brokered CDs. In my area there are Huntington Banks, PNC Banks, US Banks. It seems that these banks are able to obtain all the money they need locally. What does this say, if anything, about the banks that need to go to brokers to get the deposits they need? Does this mean anything, and is it important?

Thanks for your insight.
I have no idea. One thing that's interesting is that Wells Fargo has consistently been offering 2-year and 3-year CDs with the top rates, yet I believe if you buy a CD directly from Wells Fargo you'll get a pretty horrible rate. I think that tends to be true of other banks lately too--better brokered CD rates than direct CD rates, although I recall that being just the opposite in the past.

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

gips
Posts: 438
Joined: Mon May 13, 2013 5:42 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by gips » Sun Aug 12, 2018 9:13 am

Kevin M wrote:
Sat Aug 11, 2018 12:41 pm
In any case, I continue to believe interest rates will increase, bond funds will shed principal and the cd market is not as efficient as the broader equity or fixed income market.
If you believe rates in general will increase, then sticking with shorter-term maturities makes sense. I have little confidence in my ability to predict future interest rates, since no one seems to be very good at it, but am sticking with shorter-term fixed-income with new cash due to the shape of the yield curve, and the desire to be adequately compensated for taking term risk.
I'm not as sure as I once was that interest rates would rise (it seemed obvious with the fed manipulating historically low rates) but I'm doing my best to stick to <= 2-year terms. In the end, this could be a costly mistake but I'm guessing in another year, 4% for a 2-year term will be more common. still, if equity returns fall to say 4% nominal, which is quite possible, I suppose cd rates would probably decline. sigh. I guess the best we can do is stick with an asset allocation that makes sense for each of us.
Kevin M wrote:
Sat Aug 11, 2018 12:41 pm
I don't know if the term "not as efficient" is quite right, but clearly CDs sometimes offer significant yield premiums over Treasuries of same maturities, so can be a good deal for retail investors who can take advantage of the FDIC/NCUA deposit insurance.
yes, "efficient" is probably not the right term. My thinking is that the bulk of treasuries are held by institutions and governments. Interest rate predictions/news is efficiently priced into the instrument. While CD rates are certainly tied to prevailing interest rates, it seems to me they also reflect the issuer's need for cash/business/members. How else to explain outliers like Sharonview's 4% offering or achieva's 4.2% ira cd?

thanks for starting this thread and your continuing contributions.

best,

User avatar
jeffyscott
Posts: 7083
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: 2-year CDs at Vanguard and Fidelity Today

Post by jeffyscott » Sun Aug 12, 2018 9:33 am

gips wrote:
Sun Aug 12, 2018 9:13 am
yes, "efficient" is probably not the right term. My thinking is that the bulk of treasuries are held by institutions and governments. Interest rate predictions/news is efficiently priced into the instrument. While CD rates are certainly tied to prevailing interest rates, it seems to me they also reflect the issuer's need for cash/business/members. How else to explain outliers like Sharonview's 4% offering or achieva's 4.2% ira cd?
I would think the the outliers are just loss leaders to try to attract new customers. This is the same way I would explain Fidelity offering index funds with 0% ER and credit cards giving me $150-$1000 in cash or points for signing up and spending $500-$4000.

Aside from the outliers, I think the higher rates on CDs is partly a liquidity premium. It may also be partly an inconvenience premium in that large investors need to watch the $250K per bank limit and it is an added hassle to transfer money around in search of the best deals for all investors in direct CDs.
press on, regardless - John C. Bogle

uberme
Posts: 37
Joined: Wed Aug 12, 2015 3:17 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by uberme » Sun Aug 12, 2018 11:35 am

I'm looking at the CD rates for new issue @ Fidelity and just doesn't seem worth it compared to the MM which has a 7 day yield of around 1.55%.
3 month = 1.9%, 6m = 2%, 9m = 2.1%, 12m = 2.45%
Maybe I'm missing something given rates are rising. I guess the FDIC is a big component but don't see a MM breaking the buck.

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 11:41 am

uberme wrote:
Sun Aug 12, 2018 11:35 am
I'm looking at the CD rates for new issue @ Fidelity and just doesn't seem worth it compared to the MM which has a 7 day yield of around 1.55%.
3 month = 1.9%, 6m = 2%, 9m = 2.1%, 12m = 2.45%
Maybe I'm missing something given rates are rising. I guess the FDIC is a big component but don't see a MM breaking the buck.
First, that's a lousy money market yield--Fidelity's MM funds generally have lower yields than Vanguard's counterparts, but you can even do better at Fidelity with SPRXX at 1.83%. Vanguard Prime MM yield is 2.05%, so even a higher hurdle to clear before getting to CD maturities that are worth it.

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Consider that the MM fund now at 1.55% must average 2.45% over the next year to match the 1-year return of the 1-year CD. I believe that would require a steady climb to 3.35% in one year, for example, which is 1.8 percentage points higher than the current yield. Assuming the MM fund yield increases in line with future Fed rate hikes, that's much higher than I'd expect to see in one year.

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

User avatar
jeffyscott
Posts: 7083
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: 2-year CDs at Vanguard and Fidelity Today

Post by jeffyscott » Mon Aug 13, 2018 11:55 am

uberme wrote:
Sun Aug 12, 2018 11:35 am
I'm looking at the CD rates for new issue @ Fidelity and just doesn't seem worth it compared to the MM which has a 7 day yield of around 1.55%.
3 month = 1.9%, 6m = 2%, 9m = 2.1%, 12m = 2.45%
Maybe I'm missing something given rates are rising. I guess the FDIC is a big component but don't see a MM breaking the buck.
Also most of those are lower than Treasury yields. For example you should get about 2.23% on 6 month Treasury. I just did.

CDs make more sense at about 2 year maturity or longer.
press on, regardless - John C. Bogle

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 1:00 pm

jeffyscott wrote:
Mon Aug 13, 2018 11:55 am
CDs make more sense at about 2 year maturity or longer.
Agreed--at least in terms of yield, and in an IRA or if you pay little or no state income tax.

Some will still prefer Treasuries at lower yields than CDs due to much better liquidity, and possible negative correlation when stocks tank.

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

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

Riley15
Posts: 126
Joined: Wed May 11, 2016 9:21 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Riley15 » Mon Aug 13, 2018 4:23 pm

Kevin M wrote:
Mon Aug 13, 2018 1:00 pm

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

Kevin

The yield curve will always be relatively flat or flat in a rising or high interest rate environment. At what point is it a good idea to lock in those long-term CD rates?

There is always the risk that short term rates will have to come down again if the economy lags. If you're in 1-2 year CD's when that happens then we might not have a chance to lock in those longer term rates?

protagonist
Posts: 5320
Joined: Sun Dec 26, 2010 12:47 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Mon Aug 13, 2018 6:54 pm

Kevin M wrote:
Mon Aug 13, 2018 11:41 am

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Kevin
The only good rationale I can think of for holding money in a MM fund vs a CD offering a better yield is liquidity- what you might need in case of emergency. If you are certain you don't need the money for a year, there is no reason I can think of for choosing a MM fund over a 1 year CD if the 1 year CD offers a better yield, other than possibly convenience.

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 7:15 pm

Riley15 wrote:
Mon Aug 13, 2018 4:23 pm
Kevin M wrote:
Mon Aug 13, 2018 1:00 pm

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

Kevin
The yield curve will always be relatively flat or flat in a rising or high interest rate environment. At what point is it a good idea to lock in those long-term CD rates?

There is always the risk that short term rates will have to come down again if the economy lags. If you're in 1-2 year CD's when that happens then we might not have a chance to lock in those longer term rates?
Yes, in requiring what I consider to be adequate compensation for taking on extra term risk, I'm more subject to reinvestment risk. However, I still have some longer-term direct CDs, and some intermediate-term bond funds, which somewhat offset the extra reinvestment risk. Note that in what you quoted I am talking only about what I'm doing with new cash.

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

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 7:27 pm

protagonist wrote:
Mon Aug 13, 2018 6:54 pm
Kevin M wrote:
Mon Aug 13, 2018 11:41 am

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Kevin
The only good rationale I can think of for holding money in a MM fund vs a CD offering a better yield is liquidity- what you might need in case of emergency. If you are certain you don't need the money for a year, there is no reason I can think of for choosing a MM fund over a 1 year CD if the 1 year CD offers a better yield, other than possibly convenience.
One reason is that you believe that MM or savings account rates will increase enough in one year to average higher than a 1-year CD or Treasury. Unlikely at 1.55%, more likely at 2.06% or 2.15% (TEY of Vanguard Treasury MM fund for me now is 2.15%), and even more likely at the 2.50% I'm earning in a local savings account (guaranteed through 12/31/2019). Of course the latter case is an exception to your qualification of the 1-year CD at 2.45% offering better yield than a money market fund, but TEY of a 1-year Treasury for me is about 2.7%.

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

Riley15
Posts: 126
Joined: Wed May 11, 2016 9:21 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Riley15 » Mon Aug 13, 2018 7:38 pm

Kevin M wrote:
Mon Aug 13, 2018 7:15 pm
Riley15 wrote:
Mon Aug 13, 2018 4:23 pm
Kevin M wrote:
Mon Aug 13, 2018 1:00 pm

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

Kevin
The yield curve will always be relatively flat or flat in a rising or high interest rate environment. At what point is it a good idea to lock in those long-term CD rates?

There is always the risk that short term rates will have to come down again if the economy lags. If you're in 1-2 year CD's when that happens then we might not have a chance to lock in those longer term rates?
Yes, in requiring what I consider to be adequate compensation for taking on extra term risk, I'm more subject to reinvestment risk. However, I still have some longer-term direct CDs, and some intermediate-term bond funds, which somewhat offset the extra reinvestment risk. Note that in what you quoted I am talking only about what I'm doing with new cash.

Kevin

I am in a similar situation although I have some long term CD's most of my funds are in short term Savings/MM. It's a matter of time when it will become cost-effective to break the long term CD's for reinvestment into higher rate CD's. This here is my dilemma, if I am breaking a 5 year CD should I re-open another 5 year CD at the higher rate or open shorter term 1-2 year CD since the yield curve is near flat. If I am not replacing the long term 5 year CD's I will pretty much end up with 1-2 year CD ladder.

protagonist
Posts: 5320
Joined: Sun Dec 26, 2010 12:47 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Mon Aug 13, 2018 9:46 pm

Kevin M wrote:
Mon Aug 13, 2018 7:27 pm
protagonist wrote:
Mon Aug 13, 2018 6:54 pm
Kevin M wrote:
Mon Aug 13, 2018 11:41 am

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Kevin
The only good rationale I can think of for holding money in a MM fund vs a CD offering a better yield is liquidity- what you might need in case of emergency. If you are certain you don't need the money for a year, there is no reason I can think of for choosing a MM fund over a 1 year CD if the 1 year CD offers a better yield, other than possibly convenience.
One reason is that you believe that MM or savings account rates will increase enough in one year to average higher than a 1-year CD or Treasury. Unlikely at 1.55%, more likely at 2.06% or 2.15% (TEY of Vanguard Treasury MM fund for me now is 2.15%), and even more likely at the 2.50% I'm earning in a local savings account (guaranteed through 12/31/2019). Of course the latter case is an exception to your qualification of the 1-year CD at 2.45% offering better yield than a money market fund, but TEY of a 1-year Treasury for me is about 2.7%.

Kevin
Good point, Kevin.

Then again, a couple of years ago I put a fair amount of money into a 5 year CD at 2.57%, and more recently 5 year CDs around 3%, which was the best rate I could get at the time. So I am not sure I can trust my guessing abilities regarding the course of interest rates projecting 5 years into the future, at least enough to base my present investment decisions on my guesses. In fact, I fully expect rates to continue to rise over the next few years. That is keeping me from investing in bonds. But I am still buying into CDs at the best available rates now, rather than staying in MM accounts, waiting it out and hoping I am right.

Ultimately, in the words of the Firesign Theatre, we are all just bozos on this bus.

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Tue Aug 14, 2018 1:51 pm

Riley15 wrote:
Mon Aug 13, 2018 7:38 pm
I am in a similar situation although I have some long term CD's most of my funds are in short term Savings/MM. It's a matter of time when it will become cost-effective to break the long term CD's for reinvestment into higher rate CD's. This here is my dilemma, if I am breaking a 5 year CD should I re-open another 5 year CD at the higher rate or open shorter term 1-2 year CD since the yield curve is near flat. If I am not replacing the long term 5 year CD's I will pretty much end up with 1-2 year CD ladder.
Why are you worrying about breaking 5-year CDs with most of your funds in savings/MM? Instead, why not start deploying some of the cash into CDs and/or Treasuries, depending on maturity, type of account, and state income tax rate, with maturities in the 1-year to 3-year range, where the yield curve is reasonably steep if not very steep? Then just hold the 5-year CDs to hedge against reinvestment risk.

Unless your 5-year CD rates are very low, it's unlikely that you'll come out ahead breaking, paying the penalty, and reinvesting in a 2-year CD. I'm holding my 5-year (or longer) direct CDs until it becomes a no-brainer to break them to reinvest in a higher-yielding 5-year CD (or Treasury).

You could continue to hold some cash, and consider it the 0-year rung of your ladder. The higher the rate you can get on MM or savings, the more cash it might be worthwhile to hold.

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

Riley15
Posts: 126
Joined: Wed May 11, 2016 9:21 pm

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Riley15 » Tue Aug 14, 2018 4:39 pm

Kevin M wrote:
Tue Aug 14, 2018 1:51 pm
Riley15 wrote:
Mon Aug 13, 2018 7:38 pm
I am in a similar situation although I have some long term CD's most of my funds are in short term Savings/MM. It's a matter of time when it will become cost-effective to break the long term CD's for reinvestment into higher rate CD's. This here is my dilemma, if I am breaking a 5 year CD should I re-open another 5 year CD at the higher rate or open shorter term 1-2 year CD since the yield curve is near flat. If I am not replacing the long term 5 year CD's I will pretty much end up with 1-2 year CD ladder.
Why are you worrying about breaking 5-year CDs with most of your funds in savings/MM? Instead, why not start deploying some of the cash into CDs and/or Treasuries, depending on maturity, type of account, and state income tax rate, with maturities in the 1-year to 3-year range, where the yield curve is reasonably steep if not very steep? Then just hold the 5-year CDs to hedge against reinvestment risk.

Unless your 5-year CD rates are very low, it's unlikely that you'll come out ahead breaking, paying the penalty, and reinvesting in a 2-year CD. I'm holding my 5-year (or longer) direct CDs until it becomes a no-brainer to break them to reinvest in a higher-yielding 5-year CD (or Treasury).

You could continue to hold some cash, and consider it the 0-year rung of your ladder. The higher the rate you can get on MM or savings, the more cash it might be worthwhile to hold.

Kevin
Thanks Kevin! That's a valid point. I have 5 year CD's from 2 years ago paying only about 2.0%, not a great hedge against reinvestment. This is about the same as Savings/MM rate I am getting now. So I will have to break these CD's sooner or later, I don't think it really makes a difference as to when I break them as long as I get a higher rate whether it's 1-2 year CD's or another 5 year CD. Even if I break them to open 1-2 year CD's I am expecting the rates will be higher when they mature for reinvestment.

User avatar
Kevin M
Posts: 9874
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Tue Aug 14, 2018 6:20 pm

Riley15 wrote:
Tue Aug 14, 2018 4:39 pm
Thanks Kevin! That's a valid point. I have 5 year CD's from 2 years ago paying only about 2.0%, not a great hedge against reinvestment. This is about the same as Savings/MM rate I am getting now. So I will have to break these CD's sooner or later, I don't think it really makes a difference as to when I break them as long as I get a higher rate whether it's 1-2 year CD's or another 5 year CD. Even if I break them to open 1-2 year CD's I am expecting the rates will be higher when they mature for reinvestment.
So you essentially have 3-year CDs at 2%. New-issue 3-year brokered CD yield is 3.00%, and you probably can get 3.1% on secondary market. If your early withdrawal penalty (EWP) is six months of interest, you lose 1% to break, which you'll earn back in one year at 3%, and then you earn the higher rate for the next two years. If your EWP is one year of interest, it will take about two years to earn back the 2% penalty at 3%, then you profit from the higher rate in the last year. Either way, you end up better off breaking the CDs and reinvesting in 3-year CDs.

If your EWP is more than one year of interest, you need to do the calculation to see if it's worth it.

You can probably do even better with a direct CD, especially if you are willing to join a credit union, but of course that is extra work, and you should be sure to read the reviews so you know what you're getting into: https://www.depositaccounts.com/cd/3-year-cd-rates.html.

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

Post Reply