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the case for 5yr CD ladders with rising rates
Old 10-30-2018, 03:33 PM   #1
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the case for 5yr CD ladders with rising rates

So I've been spending an inordinate amount of time (according to my wife) staring at my financial spreadsheets. Watching the "don't buy 5 yrs while rates are going up" comments in other threads got me to scribbling.
Working off statements like "The Federal Reserve will raise the fed funds rate to 2.5 percent in December 2018, 3.0 percent in 2019, and 3.5 percent in 2020." I started to compare the difference between sticking to <12mo CDs through 2020 while the rates rise vs. building 5 year ladders now.
The results show that it really depends on what you believe rates are going to do through 2024 and beyond.
Assuming rates rise as projected above, jumping into 5 year CDs now comes out ahead through 2020 as you get a little under 1% more return while you wait. It starts to break even later around 2021 when (if) you feel its a top and start laddering to 5 yrs.
The wait strategy averages about 0.17% more a year out through 2023.
The wait strategy assumes that 5 year rates hold flat after the above stated projected hikes.
But, if the fed stops rate hikes before Dec 2020, or reverses and cuts rates to fight another recession (or play politics) sometime before 2023, then it gets back to either being a wash between the 2 strategies or even makes the "jump in now" approach come out ahead.
So, do you shun 0.76% higher returns laddering now for a 0.17% average higher rate by starting to ladder out to 5 years in Jan 2020 (at that time I'm swagging the 5yr CD at 4.75%)

Personally I'm expecting the later scenario... rates will go up a little while longer until the feds data driven approach results in “We plan to keep hiking until something breaks.” and they start cutting rates again. I don't think rates will rise and then stay flat clear out to 2023.
It's a casino, place your bets.
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Old 10-30-2018, 04:20 PM   #2
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“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

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Old 10-30-2018, 06:13 PM   #3
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Found this re: CBO prediction on treasuries (in the last week or so-forgot where)
"The*CBO expects*the interest rate on the 10-Year Treasury note to increase 4.2 percent in 2020. It moderates after that, but never returns to the sorts of very-low rates we've seen in recent years.
Ten year is 3.25,('18): 3.8 ('19), 4.2 ('20), 4.2 ('21), 3.9 ('22) 3.7 thereafter.
Three month 2.25 ('18): 3.2, ('19), 3.7 ('20), 3.7, ('21), 3.4 ('22), 2.9 ('23), mid-two's thereafter.

4.2% Ten year in 2020 looks pretty sweet.

Currently, the CD sweet spot seems two (3.05) and three (3.15) year, vs. 3.5 for five year CD (according to my broker). Keep your powder dry regarding 5 year rates-may be too soon to jump in!
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Old 10-30-2018, 08:11 PM   #4
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Originally Posted by urn2bfree View Post
“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

JK Galbraith
+1

Don't try to predict the market (equities or bonds). If you don't need the funds for 5+ years, buy total bond.
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Old 10-31-2018, 02:32 AM   #5
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The Fed doesn't set CD rates.
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Old 10-31-2018, 06:54 AM   #6
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Originally Posted by TwoByFour View Post
The Fed doesn't set CD rates.
Short-term CD yields are heavily influenced by the Fed rate and actions.

Everything stated in the original post, subject to the assumptions clearly pointed out is spot on.

Personally, I don't sweat the 0.17% or whatever. I am not in to projecting/timing when the Fed will pause/stop raising rates and just continually purchase all along the yield curve according to my personal "yield maturity allocation".
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Old 10-31-2018, 06:59 AM   #7
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Quote:
Originally Posted by brucethebroker View Post
4.2% Ten year in 2020 looks pretty sweet.

Currently, the CD sweet spot seems two (3.05) and three (3.15) year, vs. 3.5 for five year CD (according to my broker). Keep your powder dry regarding 5 year rates-may be too soon to jump in!
You can get up to 3.75% for 10 years today, and 4% for 13 years. Projecting what the rates will be beyond 3 months from now is little more than reading tea leaves.
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Old 10-31-2018, 07:10 AM   #8
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Quote:
Originally Posted by brucethebroker View Post
Found this re: CBO prediction on treasuries (in the last week or so-forgot where)
"The*CBO expects*the interest rate on the 10-Year Treasury note to increase 4.2 percent in 2020. It moderates after that, but never returns to the sorts of very-low rates we've seen in recent years.
Ten year is 3.25,('18): 3.8 ('19), 4.2 ('20), 4.2 ('21), 3.9 ('22) 3.7 thereafter.
Three month 2.25 ('18): 3.2, ('19), 3.7 ('20), 3.7, ('21), 3.4 ('22), 2.9 ('23), mid-two's thereafter.

4.2% Ten year in 2020 looks pretty sweet.

Currently, the CD sweet spot seems two (3.05) and three (3.15) year, vs. 3.5 for five year CD (according to my broker). Keep your powder dry regarding 5 year rates-may be too soon to jump in!
I can only find articles like this that were dated Feb. 2016. What date is on this article and do you have a link to it.

There is one dated August 2018 by the CBO that says rate hikes will slow not increase.

CBO Cuts 2018 GDP Outlook, Sees Fewer Fed Rate Hikes

https://www.zerohedge.com/news/2018-...fed-rate-hikes
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Old 10-31-2018, 09:09 AM   #9
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Originally Posted by njhowie View Post
You can get up to 3.75% for 10 years today, and 4% for 13 years. Projecting what the rates will be beyond 3 months from now is little more than reading tea leaves.
I just got 3.74% for 7.25 years.
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