Happiness of Rising FI Interest Rates

[dmpi]

I've already bought a boatload of 5+% CDs and with my dry powder sitting in money markets at around 5% I figure I can just sit back and relax at least for a while.

 

[RetiredAt49]

My AA = 100% equities (excluding rentals) so we do not care about fixed income returns - but glad you guys are benefiting from it.

My tIRA portfolio is up 16.05% YTD so loving that!

 

[pb4uski]

I'm viewing today's interest rates, particularly on the short end of the yield curve as a return to normal (... ok, perhaps a bit higher than normal) from the ultra low rates of the last 10-15 years.

I'd like to see the curve normalize with the short end declining and the long end increasing and inflation stabilizing at about 3%. The long war on savers may be over.

 

[gcgang]

... the interest income post-tax is still not enough to keep up with inflation, so overall I'm still losing money. The high interest rate is just a feel-good-illusion IMO.

+1

I think its called "Money Illusion", where you think in nominal terms rather than real.

For example, more people would get excited about 8% interest even if inflation was 10%, than 1% when inflation was 0.

I know I tend to suffer from this affliction myself, as I feel good that my overall portfolio is close to all time highs, when in reality my purchasing power has declined significantly.

 

[Drake3287]

Yep, right or wrong I've always had a ton of cash besides all my other investments and current pension. I'm currently on track to make $30k in CD interest this year. Of course the one downfall is that it's all taxable. I've already set up paying estimated taxes this year just because of it.

* And before people tell me I have too much cash, I'm pretty well diversified over all.

 

[audreyh1]

Not for me. The extra yield from higher interest rate for my cash position is nowhere near enough to offset losses from my equity position, not to mention that the interest income post-tax is still not enough to keep up with inflation, so overall I'm still losing money. The high interest rate is just a feel-good-illusion IMO.

+1

I think its called "Money Illusion", where you think in nominal terms rather than real.

For example, more people would get excited about 8% interest even if inflation was 10%, than 1% when inflation was 0.

I know I tend to suffer from this affliction myself, as I feel good that my overall portfolio is close to all time highs, when in reality my purchasing power has declined significantly.

+2

 

[DrRoy]

I'm getting 4.76% at Fido and the latest inflation was 4.9%, so nearly keeping even. We should be back to positive real return in another month or two.

 

[Toocold]

+1

I think its called "Money Illusion", where you think in nominal terms rather than real.

For example, more people would get excited about 8% interest even if inflation was 10%, than 1% when inflation was 0.

I know I tend to suffer from this affliction myself, as I feel good that my overall portfolio is close to all time highs, when in reality my purchasing power has declined significantly.

The issue is that inflation is a backward measure rather than forward interest rate. So yes, last year when inflation was at 8% and 0% for savings, it was pretty bad but that's now history. We can't change it. I would surmise that the go forward interest rates will be lower than the current interest rates on CD/treasuries.

Also there is no one inflation rate, and it impact different people at different rates. So if you aren't buying a used car or others that have had significant increases, it doesn't impact you. For our situation, rents on our properties are rising faster than overall inflation, so we've actually benefited from it.

 

[Mulligan]

The issue is that inflation is a backward measure rather than forward interest rate. So yes, last year when inflation was at 8% and 0% for savings, it was pretty bad but that's now history. We can't change it. I would surmise that the go forward interest rates will be lower than the current interest rates on CD/treasuries.

Also there is no one inflation rate, and it impact different people at different rates. So if you aren't buying a used car or others that have had significant increases, it doesn't impact you. For our situation, rents on our properties are rising faster than overall inflation, so we've actually benefited from it.

Yes, my “nominal” and actual amount of money are both higher. My personal rate of inflation in terms of my total monthly expenditures has never been close to 5% let alone 9%. So like you, inflation has had a positive effect for me. And as far as govt inflation reported data goes, I fully believe as you referenced, the five year plus 5% CDs will age well compared to inflation going forward.
Certainly better than 1% CDs in a 2% CPI environment of a few years ago. I didnt own those, and made good income elsewhere.

 

[COcheesehead]

One of the big factors in the fed’s inflation rate is rent. If you own a home, you’re making money. If you have a mortgage, your “rent” is going down.
I don’t compare a basket of goods that the government uses to define inflation, I use my situation. Our fixed income yield is additive to our net worth, meaning we make more than we spend. Today, with three years of retirement expenses spent, we sit just about where we were the day I retired and that includes two bear markets, ‘20 and ‘22. I thank Kitces and his bond tent strategy for that.

 

[mickeyd]

It's nice to see that my cash stash is now cooking. My notes indicate that on 8/6/23 my VG CRFMMF was yielding 1.25% compared to my Ally savings act. yielding 1.85%'

Jump ahead to now... my CRFMMF is yielding 5.03% and Ally 3.75%. I do not see it climbing much higher, but it has been a fun ride, my friends.

 

[lawman]

I would think that high inflation and high interest would be a good thing for the wealthy. Wealthy consumers will only consume a little more than middle income consumers but the interest made by the wealthy will far exceed the interest made by the middle income folks..

 

[audreyh1]

It's nice to see that my cash stash is now cooking. My notes indicate that on 8/6/23 my VG CRFMMF was yielding 1.25% compared to my Ally savings act. yielding 1.85%'

Jump ahead to now... my CRFMMF is yielding 5.03% and Ally 3.75%. I do not see it climbing much higher, but it has been a fun ride, my friends.

So Ally high yield savings is still stuck at 3.75%! Good thing I moved all my funds there to CDs, including no-penalty CDs, paying 4.65%-4.75%

AMEX Bank just moved up to 3.9% - this may force a move from Ally. Synchrony meanwhile has been paying 4.15% for a while already in their high yield savings. I had also moved a chunk of that to their 5.15% 14-month CD special.

 

[gauss]

I would think that high inflation and high interest would be a good thing for the wealthy. Wealthy consumers will only consume a little more than middle income consumers but the interest made by the wealthy will far exceed the interest made by the middle income folks..

+1 And add to the wealthy LBYM folks too right? Inflation only directly effects what you actually spend.

-gauss

 

[Andre1969]

I'd say it makes me feel better, in the sense that I can at least cut my losses by getting 4-5% on MMAs and such. But I'm still down about 15% since 12/31/2021, and that's not counting inflation. So "better" yes, but not exactly "happy." I guess am happy in the sense that it could always be worse.

 

[Toocold]

One of the big factors in the fed’s inflation rate is rent. If you own a home, you’re making money. If you have a mortgage, your “rent” is going down.

I agree on rent. One of our properties is about to go on the market and our property management company said we should list it for almost 20% above what we listed a year ago. That means in 5 years, the rent has gone up 50%. Wow. I'm glad I am on the receiving end of this.

 

[marko]

IMO, 5% with 6% inflation is better than 2% with 6% inflation. We can't do anything about the inflation but a higher interest rate at least takes some of the sting out of a bad situation.

 

[Chuckanut]

I prefer low inflation and low interest rates. My private pensions are fixed, and have been since I retired 13 years ago. Very pleased to have had such low inflation for the first 10 years though, to carry us through to the start of UK and US SS benefits.

I do also.

But, I do think the FRB kept them too artificially low over the last decade or so. Ultra low interest rates encourage crazy things like 6, 7 and 8 year auto loans where the borrower is underwater in the first three or four years if the car is totaled. Just my 2¢. YMMV.

 

[Montecfo]

I would think that high inflation and high interest would be a good thing for the wealthy. Wealthy consumers will only consume a little more than middle income consumers but the interest made by the wealthy will far exceed the interest made by the middle income folks..

Well, you have to look at the entire picture. Interest rate hikes make stocks and bonds less valuable, as we have all seen.

So buying securities after a decline is great, but your net worth declined.

We can manage spending and personal inflation rates are likely lower than reported figures since housing cost is static for many of us yet it is 30% of the CPI.

 

[COcheesehead]

Well, you have to look at the entire picture. Interest rate hikes make stocks and bonds less valuable, as we have all seen.

So buying securities after a decline is great, but your net worth declined.

We can manage spending and personal inflation rates are likely lower than reported figures since housing cost is static for many of us yet it is 30% of the CPI.

+1

 

[pletal]

Does anybody feel good about their finances now that fixed interest rates are around ~5%? I've had huge cash positions over the last several years, in anticipation of rising interest rates, that paid so little. Now that they are all in treasuries, CDs, and MM, annual passive income has shot up almost 20%!

In the same situation. Anything over the 4.5 mark is good for me. Going long with CD’s and MYGA. Passive income increased over 20k more just this year. Rates may not stay like this forever but that’s ok.

 

[wrigley]

Synchrony and Marcus high Yield Savings 4.15%

Ally 3.75%

I have a large chunk of cash in Ally and contacted them and asked why they lag so far behind Synchrony and Marcus interest rates. They basically gaffed me off. Then I told them I was thinking about moving my hard-earned money to Synchrony or Marcus and they gaffed me off once again.

Mike

 

[audreyh1]

Synchrony and Marcus high Yield Savings 4.15%

Ally 3.75%

I have a large chunk of cash in Ally and contacted them and asked why they lag so far behind Synchrony and Marcus interest rates. They basically gaffed me off. Then I told them I was thinking about moving my hard-earned money to Synchrony or Marcus and they gaffed me off once again.

Mike

You can at least buy several of their no-penalty 11 month CDs at 4.25%, the number depending on the liquidity you need as they don’t allow partial withdrawals. That’s a lot higher than the 3.85% high yield savings.

 

[Toocold]

You can at least buy several of their no-penalty 11 month CDs at 4.25%, the number depending on the liquidity you need as they don’t allow partial withdrawals. That’s a lot higher than the 3.85% high yield savings.

What's the rationale behind choosing high yielding savings account vs putting it in a treasury money market fund that yields 4.8%?

 

[pb4uski]

You can at least buy several of their no-penalty 11 month CDs at 4.25%, the number depending on the liquidity you need as they don’t allow partial withdrawals. That’s a lot higher than the 3.85% high yield savings.

But less than the 4.9% or so that MM funds are paying.