Large amount of CDs maturing....what to do?

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protagonist
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Re: Large amount of CDs maturing....what to do?

Post by protagonist » Fri Feb 26, 2016 10:48 am

dm200 wrote:
How can you account for the 25% decline? Though I realize that the fed decision directly impacts only short term, I would think that short term rates and long term rates would have a strong positive correlation. The same factors would seem involved. Five years is not even very long. And CDs are mostly short to intermediate holdings...very few greater than 5 years tops.
An example, here, of why to not place any significant bets on future interest rates. There are a lot of possibilities - and I don't know "the answer". Maybe the rise in short term rates caused much more money to flow into banks such that they did not need to pay more on the longer term CDs? I think the breakpoint where CD rates went down after the Fed increased short term rates was about 3 years.
It just seems so bizarre to me. I get that banks have so much money that they don't need more...supply and demand. And that would explain why they could lower rates now. But with the Fed planning to increase rates 1%/year for the next 3 years....quite a jump after such a long period of declining or stable rates....I would think that one could predict with greater than 50% accuracy that at some point in the not-too-distant future (next few years) bonds would decline in value and CD yields would increase. And that intermediate to long term rates would positively correlate to some degree with short term rates. And sure, anything can happen, and the Fed could easily backtrack on their plan, but they did say that, and they do call the shots, and all you really need is 50.01% accuracy to your prediction to argue against investing in something where you are most likely to lose ("sucker bet").

I'm no expert in finance. But what am I missing here?

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Kevin M
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Re: Large amount of CDs maturing....what to do?

Post by Kevin M » Fri Feb 26, 2016 12:30 pm

protagonist wrote:Kevin (or anybody else):

You mentioned (I think in a different thread) that there is little correlation between the Fed's raising or lowering interest rates and the CD yields.

Why is that?
<snip>
But my naive, commonsense knowledge of how the system works would seem to dictate that, at least eventually, if the Fed is increasing rates that the banks would follow. Why is that not the case?
That's kind of like asking why the yield curve doesn't always have the same shape. In other words, why isn't the spread between the shortest-term rate, the federal runds rate (FFR) which is a 1-day (overnight) rate and a longer-term rate like a 5-year or 10-year Treasury or CD always the same?

Economists have been studying and trying to explain the yield curve for many years, and I don't think even they really know the answer, although there are several theories (expectations hypothesis, liquidity preference theory, segmentation theory, preferred habitat theory). But the bottom line is that the steepness of the yield curve between any two maturities changes over time.

The yield curve can "flatten" (i.e., become less steep) either by shorter-term rates increasing while longer-term rates decline or stay level, or by longer-term rates declining while shorter-term rates increase or stay level. What we've seen recently is some flattening of the yield curve by an increase in the shortest-term rate, the FFR, and a decrease in longer-term Treasury and CD rates.

We also saw a gradual flattening--i.e., a decrease in the spread--between the national average 5-year CD rate and the FFR between 2009 (the earliest year for which CD data is available from FRED) and April 2013, since which time the spread has remained fairly stable. And then recently it has flattened a bit more due to the increase in the FFR and essentially no change in the 5-year CD rate.

Image

You might consider the drop in the average 5-year CD rate until April 2013 as a "catching up" of 5-year CDs to the FFR decreases by the fed leading up to 2009, or you might just view it as a reflection of the 5-year CD rate gradually responding to a less than robust economy. According to Ben Bernanke, the latter probably is more the case:
Ben Bernanke wrote:The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.
Source: Why are interest rates so low? | Brookings Institution

To view a longer relationship between the FFR and longer-term Treasury rates, FRED conveniently provides us with a chart of the 10-year Treasury rate minus the FFR (the spread between these rates):

Image

If long-term rates reliably responded to changes in the FFR, we'd expect to see the line in this chart meandering fairly closely around some value, say 1.5% or 2%, but instead we see it wildly gyrating from higher than 2.5% (steep yield curve) to large negative values (inverted yield curve).

Incidentally, we can see here why an inverted yield curve is considered by some to have some explanatory power in terms of predicting recessions, although we also see some false signals, such as in the mid-1980s.

Finally, as I've shared before, we can easily find a period when the FFR increased fairly steadily, yet longer-term rates remained steady or even declined, although we see the shortest-term Treasury rates responding fairly reliably to changes in FFR, as expected.

Image

Does this help answer the question?

Kevin
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Re: Large amount of CDs maturing....what to do?

Post by john94549 » Fri Feb 26, 2016 12:52 pm

Protagonist, I have been laddering CDs for over a decade. I've taken advantage of "hot deals" (and a few not-so-hot deals). Suffice it to say there is no lock-step correlation between the Fed funds rate and CD rates. There is also no correlation as among financial institutions. For example, how does one explain the rate on a USAA 5-yr CD (1.1%) as compared to the same product at StateFarmBank, which yields 2.2%? Or Patelco, at 2.5%.

The last time I saw any meaningful correlation was back in 2006, when the Fed was tightening and banks and credit unions were tripping over themselves to offer 5.75% on CDs*. I still have one 10-year CD from that era, purchased in January of 2008. KeyDirect, 5.6%. I chuckle when I get the statement.

*The absolutely, positively, best rate was 5.9% on a five-year from USAA bought in August of 2006.
Last edited by john94549 on Fri Feb 26, 2016 1:57 pm, edited 1 time in total.

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protagonist
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Re: Large amount of CDs maturing....what to do?

Post by protagonist » Fri Feb 26, 2016 1:48 pm

Kevin M wrote:
protagonist wrote:Kevin (or anybody else):

You mentioned (I think in a different thread) that there is little correlation between the Fed's raising or lowering interest rates and the CD yields.

Why is that?
<snip>
But my naive, commonsense knowledge of how the system works would seem to dictate that, at least eventually, if the Fed is increasing rates that the banks would follow. Why is that not the case?
That's kind of like asking why the yield curve doesn't always have the same shape. In other words, why isn't the spread between the shortest-term rate, the federal runds rate (FFR) which is a 1-day (overnight) rate and a longer-term rate like a 5-year or 10-year Treasury or CD always the same?

Economists have been studying and trying to explain the yield curve for many years, and I don't think even they really know the answer, although there are several theories (expectations hypothesis, liquidity preference theory, segmentation theory, preferred habitat theory). But the bottom line is that the steepness of the yield curve between any two maturities changes over time.

The yield curve can "flatten" (i.e., become less steep) either by shorter-term rates increasing while longer-term rates decline or stay level, or by longer-term rates declining while shorter-term rates increase or stay level. What we've seen recently is some flattening of the yield curve by an increase in the shortest-term rate, the FFR, and a decrease in longer-term Treasury and CD rates.

We also saw a gradual flattening--i.e., a decrease in the spread--between the national average 5-year CD rate and the FFR between 2009 (the earliest year for which CD data is available from FRED) and April 2013, since which time the spread has remained fairly stable. And then recently it has flattened a bit more due to the increase in the FFR and essentially no change in the 5-year CD rate.

Image

You might consider the drop in the average 5-year CD rate until April 2013 as a "catching up" of 5-year CDs to the FFR decreases by the fed leading up to 2009, or you might just view it as a reflection of the 5-year CD rate gradually responding to a less than robust economy. According to Ben Bernanke, the latter probably is more the case:
Ben Bernanke wrote:The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.
Source: Why are interest rates so low? | Brookings Institution

To view a longer relationship between the FFR and longer-term Treasury rates, FRED conveniently provides us with a chart of the 10-year Treasury rate minus the FFR (the spread between these rates):

Image

If long-term rates reliably responded to changes in the FFR, we'd expect to see the line in this chart meandering fairly closely around some value, say 1.5% or 2%, but instead we see it wildly gyrating from higher than 2.5% (steep yield curve) to large negative values (inverted yield curve).

Incidentally, we can see here why an inverted yield curve is considered by some to have some explanatory power in terms of predicting recessions, although we also see some false signals, such as in the mid-1980s.

Finally, as I've shared before, we can easily find a period when the FFR increased fairly steadily, yet longer-term rates remained steady or even declined, although we see the shortest-term Treasury rates responding fairly reliably to changes in FFR, as expected.

Image

Does this help answer the question?

Kevin
Yes, it does help answer the question.

But what I was suggesting is not that short term and long term rates move in lock-step. I know that the yield curve is sometimes negative. But isn't it more likely positive?

When I see the graph (I think it was your second?) of long term rates minus FFR over time, I don't see randomness. I see a long period of mostly negative points on the Y-axis that pretty much directly corresponded with the long, arguably relatively unusual period of stagflation from the late 60s through early 80s. The rest of the graph is positive on the Y-axis the vast majority of time, and to me, that seems to make common sense.

You don't need lockstep predictability to assess whether a bet is good or bad. You just need greater than 50% predictability to say whether, given enough time, you or the house has the advantage.

I see, very simply, two points that seem to suggest the future movement of short term rates, and thus also long term rates (if there is any positive correlation). One is the Fed's declaration. The other is the near historic low rates currently (I am not sure I believe in reversion to the mean, or even if we know what the mean is given only a century or so of data, but if it is the natural order of things, that would be a strong signal). I see no strong signs to counterbalance these two arguably strong signals (to a layman like me, anyway). That would indicate more than 50% predictability of the direction of future rates (short, eg. FFR or long term), which would mean if I acted on it, I would have the advantage over the house.

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Re: Large amount of CDs maturing....what to do?

Post by Kevin M » Sat Feb 27, 2016 12:56 pm

protagonist wrote: But what I was suggesting is not that short term and long term rates move in lock-step. I know that the yield curve is sometimes negative. But isn't it more likely positive?
Yes, it's positive more than negative, but we're not just looking at a binary situation, we're looking at whether or not history indicates that longer-term rates will reliably increase when the FFR increases.
protagonist wrote:When I see the graph (I think it was your second?) of long term rates minus FFR over time, I don't see randomness. I see a long period of mostly negative points on the Y-axis that pretty much directly corresponded with the long, arguably relatively unusual period of stagflation from the late 60s through early 80s. The rest of the graph is positive on the Y-axis the vast majority of time, and to me, that seems to make common sense.
Again, not binary, so I think you should look at the graph more closely, and think about it some more.

What I see is that it wildly gyrates from 2.5% or more (steep yield curve) to 0% or less (flat or negative yield curve) throughout the entire period. Since it doesn't mildly gyrate around any particular value, it tells me that the movement of the 10-year rate is not closely related to movement of the FFR.

I know from having looked before that if we look at short-term and long-term rates from the 10,000 foot view over the entire history available, they do look correlated; i.e., all rates generally moved higher from 1954 to about 1980, and all rates have moved generally lower since. But let's take a closer look at the relationship between the FFR and 10-year CMT. First, instead of looking at the difference, let's just look at both of them on the same chart.

Image

Rather than just looking at the long-term trends, let's look at periods when the FFR moved up or down a lot, and then look at whether or not the 10-year CMT moved up or down with it.

It's easy to see periods during which both rates generally moved in the same direction, such as 1976-1980 (up), and 1989-1992 (down). But it's also not hard to find periods, such as the one I pointed out earlier, during which they moved in opposite directions, or the FFR moved MUCH more than the 10-year Treasury. Here are a few examples:

1973-1974: FFR decreased a lot, 10yr increased
1984-1986: FFR increased a lot, 10yr decreased
1986-1987: FFR decreased a lot, 10yr increased
1992-1996: FFR increased significantly, 10yr decreased
1998-2001: FFR decreased significantly, 10yr increased slightly
2001-2006: FFR increased signficantly, 10yr decreased slightly
protagonist wrote:You don't need lockstep predictability to assess whether a bet is good or bad. You just need greater than 50% predictability to say whether, given enough time, you or the house has the advantage.
We're on the same page in terms of rate increases being more likely than rate decreases if we wait long enough, which is one reason I weight my fixed income more heavily toward direct CDs and less heavily toward bond funds. But because there's a reasonable chance that rates will remain low or go even lower over the next five years, I don't abandon bond funds entirely.

My main point here is that I just don't worry much about the FFR as the cause of increasing rates. The cause of increasing longer term rates will be either a robust economy or inflation. What the Fed does with the FFR will be more of a response to those things than a cause of those things. Read Bernanke's blog post about this if you haven't done so yet.
protagonist wrote:I see, very simply, two points that seem to suggest the future movement of short term rates, and thus also long term rates (if there is any positive correlation). One is the Fed's declaration. The other is the near historic low rates currently (I am not sure I believe in reversion to the mean, or even if we know what the mean is given only a century or so of data, but if it is the natural order of things, that would be a strong signal). I see no strong signs to counterbalance these two arguably strong signals (to a layman like me, anyway). That would indicate more than 50% predictability of the direction of future rates (short, eg. FFR or long term), which would mean if I acted on it, I would have the advantage over the house.
Again, on the same page in terms of historic rates, but not in terms of what the Fed has "declared".

I view the Fed's stated intention to gradually increase the FFR, dependent on the data, as a statement that they think the economy is in good enough shape that they can start returning to a more normal short-term interest-rate environment. That's great, and I hope the economy continues developing in a way that justifies the rate increases, but I also think that there's much uncertainty about this. And as history shows us, what the Fed does with the FFR does not foreordain what will happen with longer-term rates.

Having said that, I've done some analysis of the correlation between the FFR and the 10-year Treasury, and it is indeed positive on average since 1954, and the rolling average correlation increases as you look at longer rolling time periods. So this supports your position about the odds being in your favor in terms of longer-term rates increasing if the FFR increases. Maybe I'll share some of those results in another post.

Kevin
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Re: Large amount of CDs maturing....what to do?

Post by protagonist » Sat Feb 27, 2016 2:05 pm

Kevin M wrote: Since it doesn't mildly gyrate around any particular value, it tells me that the movement of the 10-year rate is not closely related to movement of the FFR.


Having said that, I've done some analysis of the correlation between the FFR and the 10-year Treasury, and it is indeed positive on average since 1954, and the rolling average correlation increases as you look at longer rolling time periods. So this supports your position about the odds being in your favor in terms of longer-term rates increasing if the FFR increases. Maybe I'll share some of those results in another post.

Kevin
Yes, we are in agreement that the 10-yr rate is not CLOSELY related to movement of the FFR. But if it is related AT ALL (it makes common sense to me that it should be), and if there are not other comprehensible counterbalancing factors, then one should be able to make a bet based on its direction. You might lose, but you would more often win, and, weighing that against risk is the best we can do.

The stock market also fluctuates wildly, but its trend is more positive than negative vs time (at least as far as we know based on our limited amount of data, for what that is worth), and that is enough information to convince us that betting on the market makes sense. If it was more often historically negative, or if it appeared totally random, I doubt any of us would invest in stocks.

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Re: Large amount of CDs maturing....what to do?

Post by patrick013 » Sat Feb 27, 2016 2:58 pm

Kevin M wrote: Having said that, I've done some analysis of the correlation between the FFR and the 10-year Treasury, and it is indeed positive on average since 1954, and the rolling average correlation increases as you look at longer rolling time periods. So this supports your position about the odds being in your favor in terms of longer-term rates increasing if the FFR increases. Maybe I'll share some of those results in another post.
I wish you would put some supply, issuance, outstanding, and Fed holdings
concern into your analysis. If the average spread is 2% and goes down to 1%
you can't find the answer by relying on inflation, growth, and FFR only. If
the spread goes up to 3% same thing. Supply-volume-Fed holdings and the
analysis thereof is very enlightening apart from FFR changes if any.

TRSY notes take longer to adjust on the yield curve than shorter terms so abrupt
changes to the FFR don't always cause abrupt anything long term. But a small
increase regularly would tend to be more effective to do that. The FFR is abruptly lowered or raised before a cycle can occur and results in an incomplete trend of
the long term rate in regards to that.

Just MHO.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Large amount of CDs maturing....what to do?

Post by patrick013 » Sat Feb 27, 2016 5:27 pm

Image

They chart higher than the 5 yr TRSY.
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Re: Large amount of CDs maturing....what to do?

Post by Kevin M » Sat Feb 27, 2016 8:42 pm

patrick013 wrote:Image

They chart higher than the 5 yr TRSY.
Interesting what various data sources show for CDs.

This obviously doesn't represent the CDs I've purchased since late 2010, since my average premium over same-maturity Treasuries is more than 100 basis points (this includes some 2-year, 3-year, 4-year, 6-year and 7-year CDs, but more 5-year than any of the others). But the CDs in your chart look better than what we see for the national average for 5-year CDs available from FRED, which is much lower than good CDs:

Image

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Re: Large amount of CDs maturing....what to do?

Post by protagonist » Sun Feb 28, 2016 1:09 pm

patrick013 wrote: I wish you would put some supply, issuance, outstanding, and Fed holdings
concern into your analysis.
This is an interesting point you bring up, Patrick.

At least some of these factors, and maybe others unmentioned, seem like they would be quantifiable. If we could somehow figure out how these factors drive rates in a quantifiable fashion (I am not saying this is possible but it may be), we may be able to predict movement of interest rates with greater accuracy. Maybe we already can....like I said, I am no expert here. Or maybe the whole formula is so complex that I am wrong about any degree of prediction being possible. I would accept that as a possibility.

But if we don't know these things and their impact in mathematical terms, we are left with only what we do know. The fed claims a plan of raising the FFR 1%/year for the next 3 years. More likely than not (I can't say how much more likely), the rate will rise by some extent, because they say it will, and will have a positive impact on longer term interest rates (by positive I don't mean desired, I mean they will more likely increase than decrease), because that is what usually happens, and it makes logical sense. The banks are currently awash in cash which is probably at least a big part of what is keeping interest rates low, at least in the short term. Interest rates are near historical lows and have much more room to rise than to fall. Bond valuations correlate negatively with interest rates. These facts leave us with at least some ability to vaguely predict the future, which is better than none at all. I would think that CD yields at all terms would most likely increase at some point in the not-too-distant future (next few years), and corporate bond yields would decrease. Of course, I have no idea how much more likely that scenario would be, and I could be wrong, but, without additional information, it seems like a reasonable bet, no?

Unless I was in Las Vegas getting free drinks, cheap food, and having fun, why would I gamble my money, even if the odds were only a fraction of a percent against me?

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Re: Large amount of CDs maturing....what to do?

Post by itstoomuch » Sun Feb 28, 2016 1:47 pm

Why don't people think about using your local utility company stock(s) (Widows and orphans) for their dividends? If safety is some much of a concern, then CD's or Treasuries are the choice.

Disclaimer: At one time I had to control my risk yet get a positive yield. Now that we are over the hump, the utilities holdings have become more of an controlled investment vehicle. We, likewise, have considerable amount in passbook cash from sale of Mom's house, market timing/EOY tax planning/rental income. Thinking about buying a home in HCOL area within 2 years, and selling existing home in LCOL area. 25% marginal, 65/68.

YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Large amount of CDs maturing....what to do?

Post by patrick013 » Sun Feb 28, 2016 5:12 pm

protagonist wrote:
At least some of these factors, and maybe others unmentioned, seem like they would be quantifiable. If we could somehow figure out how these factors drive rates in a quantifiable fashion (I am not saying this is possible but it may be), we may be able to predict movement of interest rates with greater accuracy. Maybe we already can....like I said, I am no expert here. Or maybe the whole formula is so complex that I am wrong about any degree of prediction being possible. I would accept that as a possibility.
The problem with interest rates is they're just so low it's depressing. We don't
want to market time for short term trading but seeing a long term trend is always
discussed it seems. I spent several hours looking for a chart with simple TRSY
monthly volume and monthly nominal yield covering many years, I guess I'll have to
make my own. Want to show, if true, that low volume results in higher yield and
high volume results in lower yield, all other things normal or explainable. Low
volume around $300 billion and high volume around $500 billion or more per
month (Average Daily Trading Volume). So as TRSY's fluctuate so should CD's.
Sometimes volume is low for months and yields are slightly higher, but want to see
the long term chart first. May use that info to buy CD's then.
Last edited by patrick013 on Sun Feb 28, 2016 9:13 pm, edited 1 time in total.
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Re: Large amount of CDs maturing....what to do?

Post by Kersten » Sun Feb 28, 2016 5:29 pm

NASA Credit Union "special" for members (not difficult to join)

49 month CD at 2.3% APY.

Unsure if this info will be of value to someone, but it was to me....so I thought I would pass it on.

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