Does a 5 yr cd ladder make sense....

[BOBOT]

....in a rising rate environment?
We have a ladder in place now (all at Ally, may change), with one of the cd's scheduled to roll over next month (to a 5 yr term).


With some of the shorter term rates I'm seeing, and with rates surely on the rise for the rest of the year, I wonder if it would be better to not lock in to the longer term. Kinda blows up the notion of a ladder, & feels a bit like market timing, but still...
And of course there's always the possibility of a recession & lower rates in the mid-term.


Thoughts?

 

[pb4uski]

+1 I have a lot of cash on the sidelines in a MM yielding 2.07% and am finding it real hard to get excited about 1-5 year CDs yielding 2.3% to 3.3%.... I'm holding out for higher rates.

From Vanguard website:

New Issue CDs

9 month	1 year	18 month	2 year	3 year	5 year	7 year	10 year
2.25%	2.30%	2.55%	2.80%	3.00%	3.30%	3.35%	3.40%

 

[IMATERP]

The more appropriate question which should be asked is "where are we in the interest rate cycle?" I'm one who believes that the Fed will have to start raising rates faster in the near future in order to slow the economy. The reason behind this is that our debt is very high and the Fed has to ensure that interest rates stay as low as possible. A difficult task in our current economy.

I'm guessing that we are probably more than half way through the rate increase cycle - so once the Fed can slow the economy down, it should be in a position where they can avoid continued rate hikes.

Thus, your idea of laddering CD's is smart. If you buy a new CD now, it will mature in 5 years, but next year you will be able to do the same at whatever the rate is.

I

 

[GrayHare]

The purpose of a CD ladder is to have ready spending cash for the next few years. Since, during most times, CDs of longer-terms pay higher rates the general recommendation is to use longer-term CDs. However when long-term rates are only marginally higher than short-term, as is the case now, there's no need to force yourself to into long-term CDs. No matter the term the cash is invested safely, which is the goal of a CD ladder. So choose any term you feel comfortable with.

 

[Dtail]

On a related comment, are you saying that you already have a 5 yr CD ladder in place at Ally?
If so, as you can see by the pb4uski CD quotes at Vanguard, Ally really only has competitive rates in the CD market at the 1 yr level.

 

[Another Reader]

Given the yield curve, no way I would go out five years. Even three years is hard to do, because rates are rising. CD's I laddered six months ago out two years don't look so good today.

With two year CD's available today at 2.80 and three years at 3.05. I'm only going a maximum of two years right now. And that's not a big percentage. I'm mostly looking at one year and less and at treasuries. Sallie Mae MM is paying 1.9, and I am upping my taxable cash there as well.

Most of my investment cash is at Fidelity and their MM fund ER's make that choice unpalatable. SPRXX is only paying 1.86, thanks to a 0.42 ER. FZDXX pays 1.98, thanks to a temporarily reduced 0.30 ER. A lot of my CD and treasury purchases there are to squeeze out a little more yield. Vanguard is more attractive for cash.

I'm waiting for the 4.5 and 5 percent rates to come back before I make really large CD commitments. Last time I bought those was 2008, I think, from Countrywide and Wachovia. Those ended up with B of A and Wells Fargo, and they paid the interest through maturity in 2012 and 2013.

 

[Freedom56]

....in a rising rate environment?
We have a ladder in place now (all at Ally, may change), with one of the cd's scheduled to roll over next month (to a 5 yr term).


With some of the shorter term rates I'm seeing, and with rates surely on the rise for the rest of the year, I wonder if it would be better to not lock in to the longer term. Kinda blows up the notion of a ladder, & feels a bit like market timing, but still...
And of course there's always the possibility of a recession & lower rates in the mid-term.


Thoughts?

If you are talking about a 3.3% yield for a 5 year CD, I would say no. For CDs, I would not go past 3 years. CDs are still better than treasuries, agency notes, and corporate notes for the same maturity.

I have been selectively spending my cash over the past month buying Barclays 2025 5.2% notes below par at an YTM of 5.5% (the minimum buy on this one was 200), Ally 4% Dec 2019 notes below par with YTM of 4.19%, Enstar 4.5% 2022 notes below par at a YTM of 4.7%. I'm not buying anything past 7 years maturity unless I see enough of a spread to make it worthwhile.

 

[foxfirev5]

I'm sticking with the 5 year ladder. I have no idea where rates are going any more than where the equity market will be next year. Anyway it only has about a 2 1/2 year avg. maturity and the 3.3% 5 year CD's will be 3.3% 4 year CD's next year.

 

[2Muchfun]

I like the look of a 3 year ladder, given the rates for years 1, 2 and 3.

 

[Ready-4-ER-at-14]

I noticed that you are only apparently looking at new issue CDs and their yields.

I've been purchasing some secondary non callable CDs lately online through brokerages. Some of them say out around 10 years were originally issued at 2.5% instead of current 3.4%. I am buying them at a discount which brings the Yield To Maturity (YTM) up to levels above the new CD rates, (maybe 3.5%).

So as an example imagine you pay $975 for a cd that on maturity pays out 1000 and pays interest coupon around 2.5% (I forget the actual discount, probably not this generous)

The big disadvantage of this is if you ever had to sell and rates went up more you might lose on the net. If you hold to maturity though, you get the YTM. I always want non callable FDIC insured stuff and if the yields are the same I go for the higher rated company. Finally I spread the money among banks.

 

[Chuckanut]

It wasn't that long ago that I routinely got as much as 4% on passbook savings accounts and 6%+ on CDs in the 1-3 year range. So, a bit over 3% for five years does not excite me.

Also, inflation is about 2.5% a year presently. I would like to beat it after taxes, and right now, one is lucky to break even. So, I would not lock in to 5 year rates right now unless the early withdrawal penalty is not severe. Then, maybe...

FWIW, my ladder is built using 1 year CDs.

 

[frayne]

I'm sticking with the 5 year ladder. I have no idea where rates are going any more than where the equity market will be next year. Anyway it only has about a 2 1/2 year avg. maturity and the 3.3% 5 year CD's will be 3.3% 4 year CD's next year.

+1 Also currently doing a five year CD ladder.

 

[BOBOT]

On a related comment, are you saying that you already have a 5 yr CD ladder in place at Ally?
If so, as you can see by the pb4uski CD quotes at Vanguard, Ally really only has competitive rates in the CD market at the 1 yr level.

Yes, currently at Ally, but they no longer have the best rates they had when we started the ladder (~6-7 yrs ago).


And while I agree that even the better rates from competitors (~3.2%) are currently not very compelling, that could change pretty quickly in a recessionary/deflationary environment.


So I'll probably stick with the 5 yr ladder - the $ is not likely to be needed anytime soon - but will start moving to different offerings as cd's mature.

 

[eytonxav]

I am using CDs + MM, but nothing further out than 3 years for CDs.

 

[njhowie]

Some good comments here, one or two that are a little unrealistic or just incorrect.

CD ladders (or near equivalents) are very good in the current environment. The key is to not put too much time into the thought process and stick to a set plan. You need to always keep in mind that we really have no idea when the rate hikes will pause or stop. My belief is that we're closer to the end of the hikes than many folks want to believe. As such, (in my view) it's important to pick up maturities all along the yield curve, possibly even going a little further out than you may be completely comfortable with. Lots of folks are plowing in to 2 and 3 year CDs right now...pick up a 5 year from time to time. Maybe even 6 or 7 years. I think that 10 years is about as far as most folks will want to go. The spreads continue compressing, and that does compound the difficulty in the decision making process. We're talking 0.1% spread from 5 year to 10 year treasuries, likewise 0.1% from 10 year to 30 year...less than 1/4 point difference between 5 and 30 year - simply shocking!

I like purchasing secondary market CDs in that there is lots of potential to pick up higher yields. We're not talking a huge amount higher than new issue, but 1/4 point is not too difficult to come by and every now and then you can find a gift at 1/2 point above the new issue rate.

With the way rates have been rising, memories fade quickly. Go back only two, three, or four years ago and look at where things were. Folks who had previously locked in to CDs with longer maturities were geniuses. Two or three years from now, we may be saying the same thing.

 

[jebmke]

Two years seems to be the sweet spot on Treasuries and CDs. Much beyond that doesn't really get paid for the term risk.

 

[Chuckanut]

This site has a history of 6 month, 1 year and 5 year CD's. It will remind us of what we used to earn 10, 15, 20, 30 years ago.

https://www.bankrate.com/banking/cds/historical-cd-interest-rates-1984-2016/

 

[jazz4cash]

I am maintaining a 5 yr ladder even though I have to swallow hard sometimes. I’ll only put the bare minimum to meet my needs, though. The rest goes wherever I see value, longer or shorter. Haven’t bought any non FDIC paper, though. The best CDs I’ve purchased were 10yr and 7 yr. Right now 3yrs has the best value to me. I also keep a close eye on NFCU for add-on CDs and buy one at the minimum which I can default to if nothing better is available when a CD matures. It’s getting easier to be patient with MM and online savings @~2%

 

[njhowie]

I am maintaining a 5 yr ladder even though I have to swallow hard sometimes. I’ll only put the bare minimum to meet my needs, though. The rest goes wherever I see value, longer or shorter. Haven’t bought any non FDIC paper, though. The best CDs I’ve purchased were 10yr and 7 yr. Right now 3yrs has the best value to me. I also keep a close eye on NFCU for add-on CDs and buy one at the minimum which I can default to if nothing better is available when a CD matures. It’s getting easier to be patient with MM and online savings @~2%

We were cut from the same cloth.

 

[brewer12345]

I don't stick to a strict ladder philosophy. I maintain a slug of longer term (up to 5 year) CDs, but I buy in bunches when I think a rate is attractive. So I recently bought some 5 year 3.05% CDs, but in the meantime the rest of the cash is in a money market awaiting opportunities. I may start buying NFCU variable rate CDs if too much cash builds up as this instrument allows me to have my cake and eat it too. Whenever I get too leery of longer term yields, I remind myself how a longer term CD portfolio has done way better than cash over the last 10 or 15 years. If I guess wrong and rates ramp heavily, I accept no more than a 1 year of interest early surrender penalty.


Where are we in the cycle? $64k question, IMO. I note that the last time the US economy was this leveraged we had a nasty bout of inflation that effectively crushed down the US debt:GDP ratio to low levels via inflating our way out of a fixed rate debt pile. Will this happen again? Dunno, but I like CDs with small surrender penalties, shorter term treasuries and floaters.

 

[gcgang]

KISS.

Don't fret (or something) with a 5 year CD ladder.

 

[copyright1997reloaded]

A secondary question (besides how much to ladder, how long to ladder, etc) is allocation. With CD and savings rates on the rise, I've been reducing my other fixed allocations (i.e. bonds) and have moved more towards FDIC insured instruments. I've also taken a bit of the cream off the top of my equity allocation and used this towards shorter term (1-3 year) CD's.

At 1% I wasn't too keen to have much tied up into traditional savings products. With things like 2.26% on a money market (Northern Bank Direct) and 3% on a 42 month CD (Connexus) these kinds of things are getting more interesting.

 

[jazz4cash]

I replaced my bond allocation (except munis) with CDs a few years ago. I arbitrarily count CDs > 2 yrs as “bonds” and anything shorter is “cash”. It’s all fixed income and it kinda auto rebalances as maturity approaches.