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Fed raises rates as expected, prompts me to think
Old 03-28-2006, 03:05 PM   #1
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Fed raises rates as expected, prompts me to think

So now the overnight fund is 4.75%, and they figure 1 to 2 more quarter point raises. This has caused me to rethink my little risk averse FI plan I had concocted. You see, DW will be staying home in a couple weeks, and will have about 10 hours of consulting work from home, and we hope to make that a permanent endevour for her, have a couple of clients etc. The thought originally was to live off of my salary, and fund the 401k and Roth IRA from it, and then take anything she makes via consulting and throw it on the house, paying it off as quick as possible. But our interest rate is 5.125%, and with the tax deduction the real cost of the loan is even lower. I could instead take everything she earns and throw it in an after tax account that "beats the spread" and throw that account on the house when either:

a) interest rates lower and I can't beat the spread anymore

b) the amount equals the mortgage balance

But I already have plenty of high risk holdings, what to throw this money into that will beat the spread but be relatively stable....money market (barely?) CD ladder (a little better), corporate bonds (more return, but more risk), utility stocks? Ideas?

Oh, wait, not trying to start pay off vs. invest and keep mortgage thing again, just looking for a way to do a little better than simply throwing the money on the house....
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 03:08 PM   #2
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Re: Fed raises rates as expected, prompts me to think

Just remember to compare your after tax yield from investing to the after tax cost of mortgage interest.

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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 03:21 PM   #3
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Re: Fed raises rates as expected, prompts me to think

Laurence, I believe the Fed is going to keep boosting rates beyond 5%. I think we will see 5.5 to 6% before they realize they have overdone it. So this is not a time to take risk with fixed income instruments.

I think your idea is a good one, but make sure you keep your maturity very short. Thta way you won't be in trouble as rates rise. 4 week T bills are now paying ~4.8%. You get:

- no credit risk
- no transaction costs
- no state income tax liability (important in CA)
- virtually no interest rate risk

I think you come out about 10BP ahead with the T bills, assuming you are in the 25% federal tax bracket. If rates keep rising (as seems likely), you can roll over the bills at higher rates until that game doesn't work any more.

I have a chunk of money from credit card 0% balance transfers sitting around earning interest, but I have chosen to stick with a money market fund for now. The difference is that the credit cards can run any ime, so I need liquidity. Your mortgage is committed until you pay it off.
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 03:28 PM   #4
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Re: Fed raises rates as expected, prompts me to think

4 week T bills? I learn something new every day! Is 10k the minimum on that?

So we won't be in a position to play this game for a year, (going to pay off our home equity line first), how might that affect the plan? If they keep going to ~5.75%, that would be about a year from now.

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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 03:34 PM   #5
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Re: Fed raises rates as expected, prompts me to think

Quote:
Originally Posted by Laurence
So we won't be in a position to play this game for a year, (going to pay off our home equity line first), how might that affect the plan?* If they keep going to ~5.75%, that would be about a year from now.*


Dunno. Let's see where rates go and how long they stay there.
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 03:43 PM   #6
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Re: Fed raises rates as expected, prompts me to think

Quote:
Originally Posted by Laurence
4 week T bills? I learn something new every day! Is 10k the minimum on that?
$1000 is the minimum. They can now be bought through the (new) Treasury Direct accounts.
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 03:55 PM   #7
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Re: Fed raises rates as expected, prompts me to think

At 4.8% percent for the 28 day t bill, I get an arbitrage bonus of 22 basis points assuming 25% federal tax rate and 9% state tax rape (pun intended).

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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 04:19 PM   #8
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Re: Fed raises rates as expected, prompts me to think

Thanks for the excel work! Hmm, good to know I shouldn't lose too much sleep over the difference. Like Brewer said, let's see where the rates go.
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 04:32 PM   #9
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Re: Fed raises rates as expected, prompts me to think

Yeah, you're talking $200 after you have $100000 in the arbitrage situation. After all the trouble, it probably isn't worth it.

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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 04:34 PM   #10
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Re: Fed raises rates as expected, prompts me to think

If 5 year cd rates reach 6% or more by this time next year, I will be happy. I will have a good chunk of money to do something with from the sell of my company's stock(private company) as I retire. That will give me enough income to live on. Of course stocks may be a lot lower *from rising rates.* * Hard to know what to wish for.*
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 05:15 PM   #11
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Re: Fed raises rates as expected, prompts me to think

I think theres one more quarter point bump and thats it.

Brewer, dont you think you're getting a little carried away by saying that t-bills are very risky?
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 05:17 PM   #12
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Re: Fed raises rates as expected, prompts me to think

I would keep the fixed rate debt... even if you have dollars to pay it off, let those dollars continue to earn cash in CDs. Today the upside is 200 bucks. But what if inflation starts to run up or we see hyperinflation. IMO fixed rate debt on income producing assets is one of the greatest things in the world. I have about $2m of 5.5% 15-30 year fixed rate debt on $4m worth of real estate. Inflation of 4% in 2006 would make me 80,000 bucks... I feel guilty praying for inflation when so many others (especially retirees) consider it public enemy number one.

I think fixed rate debt is an important part of any portfolio, to hedge against severe inflation, and to benefit from moderate inflation (which seems almost guaranteed).
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Re: Fed raises rates as expected, prompts me to think
Old 03-28-2006, 06:03 PM   #13
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Re: Fed raises rates as expected, prompts me to think

Let's see...

If a train leaves Chicago at 9 pm Friday, heading South, and another train leaves....

(Sorry, wrong forum...* : )
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