is now the time for 5 year cd?

[Drake3287]

My answer for most individual fixed income instruments is to ladder them and then stay true to the strategy of reinvesting maturing notes on the long end and enjoy life.
A ladder is a great hedge against interest rate risk and it eliminates having to guess. Rates on the intermediate/long end can drop just as easily as they go up. No one knows the future.

I generally agree with this strategy but you can't turn a blind eye to the rate at which these rates are rising compared to what they've been for several years. Paying a penalty to break a CD makes sense for many people.

A good example, I recently had a $100k CD roll over for 12 months at 2.00% and now I can get 2.75% from the same S&L. Well worth the 3 month penalty.

No crystal ball here but it's pretty safe to say rates will continue to rise. We're in almost historic times with these ever changing rates.

 

[mrfeh]

No crystal ball here but it's pretty safe to say rates will continue to rise.

If you think it's safe to say "rates will continue to rise", then you're claiming you do have a crystal ball.

Nobody knows.

 

[ShokWaveRider]

And, best of all, the NFCU 33 mo 3.3% is an add on CD up to $100K.

Unfortunately, the $100k limit is not as good as we would like.

 

[John Galt III]

It would seem (to me anyway) that rates will continue to climb, at least for the next 6 to 12 months. I fully expect CD's, for all maturities over 1 year, to be over 4% before year end, especially if the FED raises rates another .75 points in September. Personally I'm looking to start building a ladder when I see 18 to 36 month brokered CD's hit ~4%. I'm not sure I'd feel comfortable buying 4 or 5 year CD's, "this year" unless they were significantly higher, which could happen I guess.

My crystal ball calls for rates to drop in three years, so I want to have a nice 5 year or 7 year CD in place earning a smug 4% when the prevailing rate is way back down to 1% or so. I could be wrong, have been in the past, lol.

 

[COcheesehead]

My crystal ball calls for rates to drop in three years, so I want to have a nice 5 year or 7 year CD in place earning a smug 4% when the prevailing rate is way back down to 1% or so. I could be wrong, have been in the past, lol.

Inflation appears to be rolling over and rates over 5 years are dropping so you want to lock in the higher yields. The individual needs to decide what is “higher.” Right now intermediate rates appear to have peaked mid June.

 

[Chuckanut]

Inflation appears to be rolling over and rates over 5 years are dropping so you want to lock in the higher yields. The individual needs to decide what is “higher.” Right now intermediate rates appear to have peaked mid June.

Emphasis added.......

I would like to know why you think that. I am not arguing with you. I hope you are right assuming we can get a secure positive real return on our money when that happens. What makes you think we will see 1% rates as the the norm again?

I've seen double digit inflation that brought with it double digit Treasury rates. This current situation and the mood of our political leaders in regards to it is rather scary. Maybe I am a negative Nancy.

 

[jim584672]

As much as I want the highest rates possible I doubt the Fed has the brass to make it happen. Remember autopilot? Market went down 3% and autopilot off.

 

[Drake3287]

If you think it's safe to say "rates will continue to rise", then you're claiming you do have a crystal ball.

Nobody knows.

It's a pretty safe bet that rates will continue to rise for at least the rest of the year if not well into 2023. The Feds having already admitted it and because they've already been behind the curve for months on this, it's almost a sure bet most of us are willing to take.

I think few people would agree with locking themselves into a 5 year, 3% CD at this point. If things continue to get bad with the economy we could easily see 4% or more in the coming year. Just look at the last 6 months of increases.

Here's an interesting question I've always thought about during these times, how many of us almost quietly hope that the economy gets worse and rates continue to rise? I'm guessing more than a few of us are secure with our finances and have little or no debt and are simply waiting on the sidelines to make a buck. Just not something most people talk about openly.

 

[madatrub]

Inflation appears to be rolling over and rates over 5 years are dropping so you want to lock in the higher yields. The individual needs to decide what is “higher.” Right now intermediate rates appear to have peaked mid June.

Where do you see inflation rolling over? Commodities got crushed in June, but plenty of other things going into the inflation calc are still going up. And we're headed into a fall/winter where energy is very uncertain, especially in the EU.

 

[ShokWaveRider]

Our last 5 year CDs, expiring in April 2024 were for 4.05% and 3.95% respectively. Would we be investing today at 3.25%, absolutely not. Wait a few more months.

 

[aja8888]

Inflation appears to be rolling over and rates over 5 years are dropping so you want to lock in the higher yields. The individual needs to decide what is “higher.” Right now intermediate rates appear to have peaked mid June.

Historically, inflation takes years to settle down. That's been demonstrated time and time again throughout history. You have to kill demand and create high unemployment to accomplish that, and that's not happening yet.

Once the FED starts removing liquidity out of the system, like $6 Trillion worth, then inflation will come down. In September, the FED will be rolling off ~$95 billion per month in treasuries and MBS's. They have a long way to go at that rate.

 

[ShokWaveRider]

Space Coast Credit Union in Florida has a 21month CD for 3.25%. I did not see any limits. Why would one choose 5 years?

 

[WannabeRetired]

I found EFCU Financial in Baton Rouge offering a 4.0% 5-year CD. If you put in $100k+, then it goes to 4.1%. 180-day early withdrawal penalty. 5-years at 4.1% seems pretty good right now, no? Trying not to be greedy, but maybe 5% is coming at some point in the next year?

 

[RetiredAndLovingIt]

I've been mulling this one over as well, that's a good rate and will return $22251 over the 5 years.

 

[COcheesehead]

Emphasis added.......

I would like to know why you think that. I am not arguing with you. I hope you are right assuming we can get a secure positive real return on our money when that happens. What makes you think we will see 1% rates as the the norm again?

I've seen double digit inflation that brought with it double digit Treasury rates. This current situation and the mood of our political leaders in regards to it is rather scary. Maybe I am a negative Nancy.

Why? Its not only being reported and forecast that way, I see it with my own eyes. Gas by us is down $1 a gallon.

I also never said we’d see 1% rates. That was another poster. We ARE however seeing rates over 5 years dropping and have been for about 8 weeks now - rather significantly.

 

[COcheesehead]

Where do you see inflation rolling over? Commodities got crushed in June, but plenty of other things going into the inflation calc are still going up. And we're headed into a fall/winter where energy is very uncertain, especially in the EU.

I buy a lot of bonds so I watch what happens to yields over the curve. Lot of good clues there. Short end up, intermediate and long end down.
It’s often said that the bond guy is a pessimist. I trust what I see in bonds far more than what I see in equities.

 

[COcheesehead]

I think it’s kind of funny that market timers in equities are frowned upon in this forum, yet bond market timing seems to be encouraged.

 

[jazz4cash]

I think it’s kind of funny that market timers in equities are frowned upon in this forum, yet bond market timing seems to be encouraged.

I am surprised too.

 

[mrfeh]

I think it’s kind of funny that market timers in equities are frowned upon in this forum, yet bond market timing seems to be encouraged.

+100

 

[Car-Guy]

I think it’s kind of funny that market timers in equities are frowned upon in this forum, yet bond market timing seems to be encouraged.

I suspect there are more equity market timers (like me) on this forum than will admit it becasue of that perceived sentiment.

 

[DawgMan]

Curious to get some opinions on the following strategy I adopted as of the beginning of 2022 (YR 1 RE) as it is somewhat relevant to the "should I buy 5+ years of CDs (or say bonds/treasuries)"...

I decided to carve out 10 years worth of planned spend (highly discretionary) in fixed holdings and let the rest of the $$ roll in equities (currently puts my AA around 67/33). Currently, I have 5 years effectively laddered somewhat short term maturing with the longest date of mid 2023, rates ranging from around 2% - 3+%. The 6-10 yr $$ are siting in short and intermediate bond funds. My thought is while bond funds take a hit in rising interest rate environments, they seem to perform equal to or often better than individual bonds over longer stretches. I may be splitting hairs here, but have settled on this strategy for now until someone can convince me I am really better off laddering a full 10 years of spend. Further part of the strategy is to spend equities when market is up, bonds when market is down. Thoughts?

 

[pb4uski]

Dawg,

Funny that you should write that. I just suggested something somewhat similiar in the "Anyone buy an annuity simply to avoid market downturns?" thread.

The biggest problem with the above strategy [buying a SPIA to avoid the stress of downturns] is that it doesn't provide for inflation.... your expenses increase with inflation and your annuity income does not.

I think if you want to avoid the stress of market downturns you would be better off to maintain a 10 year CD/UST/bond ladder with each rung being the annual gap between annual expenditures and annual income and then invest the rest consistent with your overall target AA. If you did this you could also build into the rungs a provision for inflation in expenditures and, if applicable, income.

So for example, let's say that your expenditures are currently $100k and you have $25k of fixed income from a SPIA and $30k of SS that will increase with inflation. If you assume 4% inflation, the first rung would be $48k ($104k - $25k - $31k) and the 10th rung would be $79k ($148k - $25k - $44k). The 10 year ladder would be total $624k.

If your plan had a 4% WR, then you would have $1.125m portfolio ($45k gap/4%) so that would result in a 45/55 AA.

As each rung of the ladder matures and you use the proceeds for spending you would add a 10th year rung from the stock part of the portfolio. If stocks are down, you could defer adding the replacement rung for a few years until stocks recover.

 

[DawgMan]

Dawg,

Funny that you should write that. I just suggested something somewhat similiar in the "Anyone buy an annuity simply to avoid market downturns?" thread.

Yep. That's effectively the strategy.

Having always been total return, annual rebalance guy during the accumulation years holding only bond funds in my fixed allocation, the switch to a bond ladder strategy is a little new to me. Knowing I have 10 years of spend helps me feel comfortable letting the balance run in equities (I believe in "playing the game", despites having "won the game" ) for legacy/charity reasons. Plus, it's just my nature to try and reasonably grow my assets. I suppose my only real head scratcher is what may be best with my 6 - 10 yr $$?

 

[teej1985]

You'll never know. I did a 5 year 3.15% add on CD in 2019. Never would have guessed we'd be higher now.

 

[pb4uski]

You'll never know. I did a 5 year 3.15% add on CD in 2019. Never would have guessed we'd be higher now.

Me too.... but while th 5 year CD is slightly higher, the 3.0-3.5% that I get from my 2019 credit union specials CDs are stlll competitive with CDs for the 2 year remaining term... so I'm satisfied.