Interest Rates on the Move! (Finally)

[audreyh1]

After years and years of folks expecting interest rates to climb, interest rates have really moved up this year, particularly this week. The 2yr treasury zoomed past 2% for the first time since 2008, the 10 yr past 2.4% and the 10 yr is awfully close to the 2.6% level that some pundits claim will hurt the equity markets.

Even though the yield curve continues to flatten, all rates have moved up except for the 30 yr bond which is holding steady.

Inflation still seems to be holding at sub-2%, but other things have got the bond market a bit rattled: the continuing Fed balance sheet unwind, China indicating perhaps it would purchase less treasuries, Bloomberg indicating that repatriation of overseas assets means selling US backed bonds held overseas.

I am invested in fixed income for the long term. I figure if it gets hit hard this year I’ll have an opportunity to rebalance. Tough years are usually followed by bond market rallies. It’s just interesting to watch things unfold.

It will be really interesting to see what high yield savings accounts yield this year and what CD offers will be near the end of this year.

 

[Danmar]

Yes, looks like they are finally moving back to more normal levels. Some companies will benefit (especially banks) while most others will face higher debt costs. Lower taxes will offset. I don’t have any FI (view my pension as a FI proxy) and am overweight banks, so looks like I’m well positioned. But in the overall scheme of things it has to be a good thing when the economy is doing so well and jobs are being created.

 

[BeachOrCity]

The yield curve is only about 50 BP away from inverting. If it does invert ...... bad thigs could be coming economically. I would pay more attention to the 2-10 year spread than to short term interest rates as a predictor

 

[DrRoy]

We do not hold a lot of cash, but it is nicer to make something on what we have.

 

[audreyh1]

The yield curve is only about 50 BP away from inverting. If it does invert ...... bad thigs could be coming economically. I would pay more attention to the 2-10 year spread than to short term interest rates as a predictor

I’m skeptical that it will invert based on recent behavior with the 10yr rate rising. Maybe ignoring the 30 year.

But if it does, usually that portends a recession in two years.

 

[DEC-1982]

The effect on future estimated pension payments, already increasing, is especially welcome.

 

[braumeister]

It will be really interesting to see what high yield savings accounts yield this year and what CD offers will be near the end of this year.

My online savings account at Discover (opened through AAII) just got bumped up to 1.45%. Nice start to the year.

 

[pb4uski]

Interesting.... their website and my account say 1.40%, not 1.45%... I wonder if AAII has a special deal with a 5bp bump?

https://www.discover.com/online-banking/savings-account/

 

[Pilot2013]

I think it is interesting that we are talking about 1-2% interest as a.) a boon for interest rates, and b.) OMG, interest rates are climbing, bad things are going to happen. When interest rates start tripling or quadrupling I'll worry about bad omens. For now, it is still well under inflation, and by the way, inflation is really low...

 

[audreyh1]

Interesting.... their website and my account say 1.40%, not 1.45%... I wonder if AAII has a special deal with a 5bp bump?

https://www.discover.com/online-banking/savings-account/

Apparently they do as one other poster reported.

In the meantime, Synchrony Bank is offering 1.45% standard and I notice some places offering 1.5% and 1.6% according to Bankrate.com.

 

[braumeister]

Interesting.... their website and my account say 1.40%, not 1.45%... I wonder if AAII has a special deal with a 5bp bump?

Yes, as I've said before, I opened this account as an AAII member years ago, and it has always been .05% higher than the published rate.

https://aaii.discoverbank.com/aaii/index.html

 

[Another Reader]

Synchrony is still at 1.5 percent for savings and 2.0 percent for 1 year CD's.

I bought some more 3 month to one year CD's plus some 2.3 percent 2 year Wells Fargo CD's at Fido for cash in the IRA in the last few days. Trying to keep the ladder at one year because interest rates are rising, but was tempted to put a little in the 2.3 percent two year CD's. The government money market settlement fund is at 0.95 percent, I think.

 

[audreyh1]

Synchrony is still at 1.5 percent for savings and 2.0 percent for 1 year CD's.

I bought some more 3 month to one year CD's plus some 2.3 percent 2 year Wells Fargo CD's at Fido for cash in the IRA in the last few days. Trying to keep the ladder at one year because interest rates are rising, but was tempted to put a little in the 2.3 percent two year CD's. The government money market settlement fund is at 0.95 percent, I think.

Synchrony is still at 1.45% for savings AFAIK.

 

[Another Reader]

Oops. Goldman Sachs/Marcus is at 1.5 percent. I have both, got confused.

ETA: Getting kind of annoyed at Ally. They are sticking at 1.25 percent. A quarter point does not generally motivate me to transfer money, but 1.5/1.25 is a 20 percent difference, so I'm griping.

 

[Pilot2013]

A pension that I have from a former employer (that I can't get at until I am 65) has a guaranteed interest rate each year set at the beginning of the year. Let year was 4.10%. I just looked to see if 2018was updated, and it is, and is set at 4.17%

I would like to know what they are investing in. Even 30 year T-bills are only slightly over 1/2 of this i think. Ok by me, just wondered what they have this invested in for these return "interest" rates.

 

[brewer12345]

At this point in the cycle I am not eager to lock anything in. I have CDs maturing through this year and they will likely get rolled over to short terms. In brokerage accounts I am throwing in the towel and investing portfolio cash into FLRN (a bit), a floating rate corporate fund, and Treasury floaters. I think I am happiest with the latter, as these are two year maturity treasuries that pay a quarterly rate based on the coupon (near zero) plus a floating rate based on 90 day T bills. If I want or need out earlier than maturity I can always sell and the short maturity and floating rate nature means they will always stay close to par.

 

[kgtest]

Yes, looks like they are finally moving back to more normal levels. Some companies will benefit (especially banks) while most others will face higher debt costs. Lower taxes will offset.

work for one ESOP also well positioned like Danmar with my ETF hedge

 

[audreyh1]

The interest rate calendar by month - the 10 year interest rate tends to rise through April, with April being the month with the highest rise. Then peter out during the summer which a substantial drop in rates in August.

So given the seasonal pattern I think we'll see a strong rise in rates through April before anything backs off.

If the 10 year gets close to 3% that could spook the equity markets.

 

[Sunset]

Yes, as I've said before, I opened this account as an AAII member years ago, and it has always been .05% higher than the published rate.

https://aaii.discoverbank.com/aaii/index.html

Are you a fan of AAII ?

Over the years I've gotten their mailings, have wondered, but others on the web said all the info is already on the internet/common knowledge.

What are your thoughts, is it good ?

 

[braumeister]

Are you a fan of AAII ?

Wouldn't call myself a fan, but not a critic either. A long time ago when I wasn't as knowledgeable about investing, I decided their information was as good as I had seen anywhere else, so I bought a lifetime membership. Nothing bad to say about them, as long as you ignore their occasional attempts to get you to sign up for their special programs. I still occasionally find a nugget of useful advice in their stuff.

 

[gayl]

I have a stupid question: what's better CDs, bonds, or bond funds and why. I'm thinking (but only acting on a conditional trade) of moving abut 2% into fixed investments to up that to 10%

 

[ejman]

Interesting to see that the Vanguard Money Market fund currently has a yield of 1.44%. If memory serves not too long ago it was way below 0.5%

 

[JustCurious]

Inflation still seems to be holding at sub-2%...

The most recent CPI-U inflation rate (Consumer Price Index for All Urban Consumers) is 2.1% for the 12 months ending December 2017.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.
...

The all items index rose 2.1 percent for the 12 months ending December, compared to 2.2 percent for the 12 months ending November.

https://www.bls.gov/news.release/cpi.nr0.htm

 

[njhowie]

I have a stupid question: what's better CDs, bonds, or bond funds and why. I'm thinking (but only acting on a conditional trade) of moving abut 2% into fixed investments to up that to 10%

It's not a stupid question at all.

The answer will depend on your situation, your approach to investing, how much work you want to do, and how much risk you want to take.

If you want quick and easy with very little thought and no risk, just take CDs. They are all FDIC insured, and your entire effort is simply sorting what your broker offers by yield and maturity date. Decide roughly the maturity you want, then just take the highest yield you see. Now, you can get yields a bit higher than what your broker offers through their new issues...you can also purchase CDs through the secondary market. Fidelity charges $1/CD commission on secondary market CD orders, Etrade charges $1/CD with a $10 minimum. You can go to the fixed income section of your brokers website and similarly scan a list of the secondary market CDs available which you can sort/filter to find some that look good. You can compare the effective yield after commission with the new issue yield to verify you're getting a good deal. I periodically find secondary market CDs at yields 0.25% or more higher than the equivalent maturity new issue CD. This morning I bought a 2-year CD yielding 2.55% on the secondary market. Equivalent maturity new issue is 1.95%-2.3%.

As far as bonds vs. bond funds, if you have a larger fixed income portfolio, purchasing individual bonds is more beneficial as you have total control. On the day you purchase, you know exactly how much money you will get and the day you will get your money back. When you invest in a bond fund, there is no guarantee of payouts from the fund, and there is no guarantee that you won't lose money. However, what the bond fund will provide is diversification and liquidity - you could sell any time you like. With individual bonds, the market is less liquid and you may have to accept a low price if you need to sell. In general, when investing in individual bonds, it's best to have the mindset that when you buy, your intent is to hold until maturity. If you purchase individual bonds, you will need to do all the research yourself, and it can be involved. If you are not prepared to do the work, or don't have a good finance background to be able to make a knowledgeable decision about what bonds to purchase or not to purchase, then just stick to the bond fund.

There's lots more than can be discussed, but that's my quick overview.

 

[audreyh1]

The most recent CPI-U inflation rate (Consumer Price Index for All Urban Consumers) is 2.1% for the 12 months ending December 2017.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.
...

The all items index rose 2.1 percent for the 12 months ending December, compared to 2.2 percent for the 12 months ending November.

https://www.bls.gov/news.release/cpi.nr0.htm

The YOY core (less food and energy) which is how the Fed tracks inflation over the 12 months or less (short term) was under 2%. The food and energy component is very volatile month-to-month.

The all items index rose 2.1 percent for the 12 months ending December, compared to 2.2 percent for the 12 months ending November. The index for all items less food and energy increased 1.8 percent over the last year; the 12-month change has now been either 1.7 or 1.8 percent for eight consecutive months. The food index rose 1.6 percent over the past year; the index for energy increased 6.9 percent, with all of its major component indexes rising during 2017.

% change YOY core CPI versus “headline” CPI which includes food and energy. As you see in the graph below tracking the annual changes in the Core CPI gives the Fed a less volatile read at any moment in time. It’s not used past 12 months.

They also look at PCE https://fred.stlouisfed.org/series/PCETRIM12M159SFRBDAL