Interest Rates on the Move! (Finally)

NASA FCU has 11 mo CD @2.25 apt w/ 20k min for taxable or IRA.
Their 15 mo CDs are at 1.95 apy w/ 5k min.
 
Freedom56 said:
I stand by my forecast on interest rates from one month ago. The yield curve has flattened even more. Retail sales are weak. It's a matter of time before we see a rate inversion.
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+1

What is most eye-popping/frightening is if you look at the curve/table and take a moment to look at the spreads, really understanding what it's telling you, it is mind-boggling. Look at the 10-year/30-year spread - just below 0.25% - you take 20 more years and you are being compensated with a rate not even 1/4 point higher - and there are folks/institutions buying up 30-year maturities. Almost the same situation/spread going from 5-year to 10-year.

So, the question becomes - at what point do the longer term rates need to rise, widening the spreads? If we really invert, history tells us that we're extremely likely within striking distance of the next recession. As fixed income investors, where does that leave us? Looking at the abyss ahead of us once again? Buy up the short-term CDs while these 2%-3% rates are still here? Start buying up 5 and 10 year maturities even though those too will only get us 3%, as the Fed will once again have to be lowering rates? Begin grabbing some longer term fixed income instruments like preferred stock and bonds?
 
Of course it's a matter of when, not if. Recessions always occur eventually. But that's not particularly actionable, because it can take a long time, it can take a short time.

Sure, we're very likely late in the business cycle, with the Fed raising rates and this time also doing quantitative tightening, and other pressures on bond prices like rising debt. Usually the Fed gets us close to the edge, but it often takes another unexpected event to trigger it.

So I just stick to my AA, and rebalance after the SHTF.

The curve had actually been steepening since the end of Jan. Now it's flattened a bit again. There is a definite tug-of-war going on. It's not all in one direction.
 
njhowie said:
+1

What is most eye-popping/frightening is if you look at the curve/table and take a moment to look at the spreads, really understanding what it's telling you, it is mind-boggling. Look at the 10-year/30-year spread - just below 0.25% - you take 20 more years and you are being compensated with a rate not even 1/4 point higher - and there are folks/institutions buying up 30-year maturities. Almost the same situation/spread going from 5-year to 10-year.

So, the question becomes - at what point do the longer term rates need to rise, widening the spreads? If we really invert, history tells us that we're extremely likely within striking distance of the next recession. As fixed income investors, where does that leave us? Looking at the abyss ahead of us once again? Buy up the short-term CDs while these 2%-3% rates are still here? Start buying up 5 and 10 year maturities even though those too will only get us 3%, as the Fed will once again have to be lowering rates? Begin grabbing some longer term fixed income instruments like preferred stock and bonds?
Click to expand...

No investor in their right mind would buy a 30 year bond or even a 30 year corporate bonds rated at AA or higher. The coupons are far too low for their duration. This is why bond funds are a bad idea. They buy/sell based on term allocations in their portfolio and inflows/outflows. They make or lose other peoples money while collecting their fees. The yield on most bond funds are pathetic given their market risk.

You can get about 4% yield on a one year note from Ally Financial or 3.5% yield on a one year note from Ford and their default risk for the remainder of their term is nil. If the preferred stocks that I sold in December (JP Morgan, Bank of America, Wells Fargo, Citibank, Capital One) drop below par, I will jump right back in.
 
I have progressively reduced my longer term bond holdings over the last few years. Almost all of my fixed income allocation is in relatively short duration instruments (1-4 years) or TIPS/i-bonds (inflation adjusted).

However, even if we do get a yield curve inversion it doesn't necessarily mean that the recession is here or Mr Market will immediately tank. Most market peaks come 12-18 month AFTER the inversion.

However (to the however), I continue to pare equity holdings a little at a time as a way to limit risk. I was well north of 70% equities in April 2016, pared down as one of my bigger holdings was bought out mostly in cash, and I have continued to pare a bit at a time starting mid-January 2018. Now at about 65% equities.
 
Freedom56 said:
...
You can get about 4% yield on a one year note from Ally Financial or 3.5% yield on a one year note from Ford and their default risk for the remainder of their term is nil. If the preferred stocks that I sold in December (JP Morgan, Bank of America, Wells Fargo, Citibank, Capital One) drop below par, I will jump right back in.
Click to expand...

So what is a one year note from Ally Financial? Not CDs or demand notes as far as I can tell - because the current rates are more like 2% and a demand note is for Ally employees or connected family only.
 
^ Thanks - we lend on property, but bonds and stocks I'm pretty clueless about.
 
audreyh1 said:
Wow - huge retreat in interest rates over the past few days. 10 year trading where 5 year was, etc.

Quite a reversal.
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10 year is now 2.719%...I bought 3 year CD at 2.9% earlier today.
 
I expected the 10-year to exceed 3% and even reach 3.1% soon.

What’s blowing my mind is seeing the 5 year so close behind at 2.9% already!
 
Schwab has CD's:

2.75 2 years
2.95 3 years
3.20 5 years
3.30 10 years

It appears that 2 to 5 years is where the action is....

as of today.
 
audreyh1 said:
I expected the 10-year to exceed 3% and even reach 3.1% soon.

What’s blowing my mind is seeing the 5 year so close behind at 2.9% already!
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If you want even more mind blowing, look at the 30-year in relation to the 10-year.

Flat yield curve.
 
Long rates have gotten back to their May high yields for the year - not quite exceeding them.

But the 5-year treasury has reach a yield not seen since 2009. It got very close to 3% this morning.

The 2-year treasury has reached a yield not seen since 2008.

The Fed is widely expected to raise the Fed Funds Rate another 0.25% tomorrow.
 
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I noticed 5 year TIPS were at 0.93%. I take this as implying we might expect at least 1% real from intermediate bonds that are not inflation adjusted. Then you get some more (big maybe) if going with investment grade.
 
audreyh1 said:
The Fed is widely expected to raise the Fed Funds Rate another 0.25% tomorrow.
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Assuming the rates are raised tomorrow, when would be a good time to invest in a CD (about how long does it take for the banks to raise their CD rates after the Fed raises its rates)?
 
redduck said:
Assuming the rates are raised tomorrow, when would be a good time to invest in a CD (about how long does it take for the banks to raise their CD rates after the Fed raises its rates)?
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CD rates have already been moving up in anticipation of the rate hike. Look for the laggards to raise their rates to match those who were out ahead of it.
 
I’ve been waiting for the increase. Brokered CDs for 3 year did got up .10% from my last purchase.
 
redduck said:
Assuming the rates are raised tomorrow, when would be a good time to invest in a CD (about how long does it take for the banks to raise their CD rates after the Fed raises its rates)?
Click to expand...

Hard to say. Seems like adjustments have been a bit slow. The banks are competing with each other and changes have been gradual and not necessarily timed to the Fed increases.
 
CDs rates are going to closely track mortgage rates since the money that the bank gets from CDs is used to fund bank loans. Mortgage rates are largely determined by market forces when the loan is repackaged and sold. The buyer will demand a certain return, which is heavily influenced by inflation. So there is no direct linkage between CDs and the Fed rate. However, both are influenced by inflation. If rates for CDs (and US Treasuries) are rising, it is probably because everyone believes inflation is going to go up. After all, the Fed told us that when they raised their overnight rate. :)
 
audreyh1 said:
Hard to say. Seems like adjustments have been a bit slow. The banks are competing with each other and changes have been gradual and not necessarily timed to the Fed increases.
Click to expand...

Kinda sorta. If you do a bit of googling, you will find that the banks and analysts that follow the industry are all gabbling about "deposit betas." What they are talking about is the percentage of the change in the fed funds rate that the banks pass along to their depositors. In most interest rate increase cycles, the average eta through the cycle is typically 50-something percent. Typically betas start off low and rise through the cycle until shortly after rates peak. So I would guess that we will continue seeing short term deposit rates rise until fed funds rates peaks.

Longer term deposit rates (CDs) are a little tougher to cuff. By and large I would guess that CD rates move based on a combination of what short term rates and similar maturity treasury rates do.

Different types of banks have different betas. Traditional bricks and mortar banks are not usually high beta propositions. Online banks tend to be high beta.
 
.

Experts think the Fed will continue to raise rates several times the next year or so.

Good for savers... bad for debtors.

I just took out a "variable CD" which will increase [or decrease] with the Fed Funds Rate but never go below the floor rate. For my five year CD, the floor rate is 3%.

.
 
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