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.
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.