When (in 2022 to 2023) would you invest cash in a longer term CD?

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water2357
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When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by water2357 »

It appears that the Fed will continue to increase interest rates throughout 2022 and into 2023. Given that you would like to invest some funds in CDs, when would you start investing in longer term CDs (3 to 5 years)? Are you planning on waiting until later in 2022, e.g. after July 2022 or after September 2022? Or would it be better to wait until sometime in 2023? Or do you start your CD ladder now, knowing that rates may well be higher in a few months? And how long a term makes sense for that ladder?

Brokered CDs for 3 years are slightly greater than 3%, not much difference today between 3 and 5 year rates.

Very short term Treasuries are at about 1%.

So, any thoughts on how to navigate these changing rates?

Thanks.
Last edited by water2357 on Fri May 13, 2022 9:07 am, edited 2 times in total.
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Re: When would you invest cash in a longer term CD?

Post by Call_Me_Op »

There is no one-size-fits-all answer. It depends when you need the money, as well as how comfortable you are with interest-rate risk. I have purchased 10-year brokered CDs in the past because I felt they were a good deal at the time and I did not need the money within 10 years. Obviously, if this is money you need in a year or two you would not buy a 5-year brokered CD because you might need to sell it at a loss.
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Re: When would you invest cash in a longer term CD?

Post by nisiprius »

I think brokered CDs have interest rate risk and fluctuate in value just like bonds--you don't have the option to redeem before maturity with a known, fixed, small penalty.

I would only invest cash in a CD if I were very confident that it would not be a hardship to hold until maturity. The reason is that I am paranoid about the possibility that banks might deny an early withdrawal. This is just my personal shtick. Very briefly, CDs do not have identical terms and conditions. Many of them give the bank the right to deny an a early withdrawal. So they can deny early withdrawal but by custom and policy they don't. What could change things? My answer is: if there were such a big increase in rates that it were to create a tsunami of requests to break low-rate CDs, and the resulting loss of deposits were to be a problem they could no longer ignore, or shrug off in the interest of public relations.
Last edited by nisiprius on Fri May 13, 2022 8:43 am, edited 1 time in total.
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water2357
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Re: When would you invest cash in a longer term CD?

Post by water2357 »

Assume money is not needed for at least 5 years and CDs will be held to maturity. The CDs are a portion of a larger portfolio. Thanks.
Last edited by water2357 on Fri May 13, 2022 8:41 am, edited 1 time in total.
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Re: When would you invest cash in a longer term CD?

Post by Call_Me_Op »

nisiprius wrote: Fri May 13, 2022 8:38 am I think brokered CDs have interest rate risk and fluctuate in value just like bonds--you don't have the option to redeem before maturity with a known, fixed, small penalty.
That is correct. They are essentially FDIC-insured bonds with relatively low liquidity.
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Re: When would you invest cash in a longer term CD?

Post by Call_Me_Op »

water2357 wrote: Fri May 13, 2022 8:39 am Assume money is not needed for at least 5 years. The CDs are a portion of a larger portfolio. Thanks.
In that case, why not? I would select one that is not callable. And of course, if in a taxable account the interest is fully taxable each year at your marginal rate both federally and at state level.
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Re: When would you invest cash in a longer term CD?

Post by water2357 »

Does that mean you would start a CD ladder now with 5 year CDs (or 3yr CDs?) and add to it as 2022 progresses, even though rates will most likely continue to rise throughout 2022?
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Re: When would you invest cash in a longer term CD?

Post by BogleMelon »

I was learned from this forum that treasuries are better than brokered CD's (in this market at least). That is what I am personally doing.
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Re: When would you invest cash in a longer term CD?

Post by Call_Me_Op »

water2357 wrote: Fri May 13, 2022 8:47 am Does that mean you would start a CD ladder now with 5 year CDs (or 3yr CDs?) and add to it as 2022 progresses, even though rates will most likely continue to rise throughout 2022?
What rates are most likely to continue to rise?
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Re: When would you invest cash in a longer term CD?

Post by bltn »

nisiprius wrote: Fri May 13, 2022 8:38 am I think brokered CDs have interest rate risk and fluctuate in value just like bonds--you don't have the option to redeem before maturity with a known, fixed, small penalty.

Agree with this. For this reason, I don t buy brokered cd s instead of bonds if I want liquidity in my cd investment. I look for bank or credit union cd s with the best rates, and early redemption penalties of no more than 6 months interest. I currently hold 5 year cd s with a 3 month early redemption penalty. I ll look to replace them around the end of this year or early next year depending on what interest rates do between now and then. And replace them again if interest rates continue to rise. This management is made possible by the low early redemption penalty. And with the smal redemption penalty the same for 3 and 5 year cd s, I see little reason not to get
the 5 years.
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Re: When would you invest cash in a longer term CD?

Post by Call_Me_Op »

BogleMelon wrote: Fri May 13, 2022 8:50 am I was learned from this forum that treasuries are better than brokered CD's (in this market at least). That is what I am personally doing.
Not necessarily. There are differences between the two, but if you plan to hold to maturity and you stick to non-callable CDs, there is very little difference. The only tangible difference in that case is taxation. The CD interest rate is not necessarily guaranteed if the bank fails, but worst-case you will get your principal back and have the option to re-invest the proceeds.
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Re: When would you invest cash in a longer term CD?

Post by Parkinglotracer »

I have mid 6 figure ladder with 1-3 year treasury bills and notes. I will continue to do that with fixed income as well as using ibonds, g fund, mm cash at t mobile. If rates are really favorable someday i may extend my ladder.
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Re: When would you invest cash in a longer term CD?

Post by water2357 »

3 to 5 yr CD rates will most likely rise as 2022 progresses. My question is not about whether one should invest in CDs. It's a question of given you are going to invest in CDs, at what point in time during 2022 through 2023 would you start investing in longer term CDs.

I.e. do you start your CD ladder today or do you wait to start your CD ladder until e.g. September 2022 or some other date?

In the meantime, your funds are in a very short term investment, e.g. Treasury Bills, Money Market Fund, etc.
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Re: When would you invest cash in a longer term CD?

Post by Call_Me_Op »

water2357 wrote: Fri May 13, 2022 9:02 am 3 to 5 yr CD rates will most likely rise as 2022 progresses.
This is not necessarily the case. Are you confusing the Fed funds rate with 5 year CD rates? They are two very different things.
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Re: When would you invest cash in a longer term CD?

Post by goingup »

water2357 wrote: Fri May 13, 2022 8:47 am Does that mean you would start a CD ladder now with 5 year CDs (or 3yr CDs?) and add to it as 2022 progresses, even though rates will most likely continue to rise throughout 2022?
You could build a 5 yr CD ladder. Maybe you know this already, but you buy a 1,2,3,4,5 year CD. Every year as each matures, you roll it into a 5 year CD. We did this for many years. Of course, if you need the money in 5 years this isn't a great idea. It's a method for perpetuity. :happy
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by water2357 »

That's why I said "will most likely rise". 5 year rates in particular don't seem to be moving much compared to shorter term rates. So, maybe the ladder should be based on CDs with 3 year terms. I'm just looking for others thoughts on how/when to put some funds in CDs with terms longer than 1 year in this changing/increasing interest rate environment.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Call_Me_Op »

water2357 wrote: Fri May 13, 2022 9:13 am That's why I said "will most likely rise". 5 year rates in particular don't seem to be moving much compared to shorter term rates. So, maybe the ladder should be based on CDs with 3 year terms. I'm just looking for others thoughts on how/when to put some funds in CDs with terms longer than 1 year in this changing/increasing interest rate environment.
I would argue we really have no idea what will happen to 3-5 yr CD rates over the next few years. All expected fed actions are already baked-in and the yield curve is essentially flat across that range. The advantage of holding some CDs with maturities beyond 1 year is that rates on CDs with similar maturities might actually fall in the future.
Last edited by Call_Me_Op on Fri May 13, 2022 9:22 am, edited 1 time in total.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Rudedog »

Buying T-bills for now, this inflation has me wary of buying any long-term CDs.
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Re: When would you invest cash in a longer term CD?

Post by bltn »

nisiprius wrote: Fri May 13, 2022 8:38 am I think brokered CDs have interest rate risk and fluctuate in value just like bonds--you don't have the option to redeem before maturity with a known, fixed, small penalty.

I would only invest cash in a CD if I were very confident that it would not be a hardship to hold until maturity. The reason is that I am paranoid about the possibility that banks might deny an early withdrawal. This is just my personal shtick. Very briefly, CDs do not have identical terms and conditions. Many of them give the bank the right to deny an a early withdrawal. So they can deny early withdrawal but by custom and policy they don't. What could change things? My answer is: if there were such a big increase in rates that it were to create a tsunami of requests to break low-rate CDs, and the resulting loss of deposits were to be a problem they could no longer ignore, or shrug off in the interest of public relations.
I didn t notice the second paragraph when I posted earlier. I ve never thought about my credit union denying early withdrawal. I never even cosidered such a possibility. I ll have to call my CU and ask about this.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by 50/50 »

For what it's worth I recently added 3 year, 4 year and 5 year CD's to my ladder. I have no idea what will happen with rates but I liked the idea of locking in some 3% yield and extending my average out a little because it had been wadding up around the 2 year maturity in the last little while.

If rates continue to rise I'll take advantage of that later this year when more CD's and treasuries mature.
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Re: When would you invest cash in a longer term CD?

Post by evelynmanley »

Call_Me_Op wrote: Fri May 13, 2022 8:54 am
water2357 wrote: Fri May 13, 2022 8:47 am Does that mean you would start a CD ladder now with 5 year CDs (or 3yr CDs?) and add to it as 2022 progresses, even though rates will most likely continue to rise throughout 2022?
What rates are most likely to continue to rise?
You might like these articles:

Federal Reserve, the Economy and CD Rate Forecast - May 10, 2022
POSTED ON WEDNESDAY, MAY 11, 2022 BY Ken Tumin

https://www.depositaccounts.com/blog/fe ... edictions/

and:

https://www.depositaccounts.com/blog/cd-rates-survey/

https://www.depositaccounts.com/blog/in ... ngs-bonds/
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Hector »

I generally don't buy CDs. Most of my fix income is in Short Term Treasurys. I have been buying Treasurys with ~5 years maturity to maintain average 3 years maturity all these times when rates are going up.
One change I am doing is, instead of selling it when 1 year duration is left, I am letting it mature (when rate on 1 year remaining maturity is greater than the rate of note when I originally bought it). But I am still maintaining average ~3 years of maturity by buying slight longer term notes with new money.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by hudson »

water2357 wrote: Fri May 13, 2022 8:31 am So, any thoughts on how to navigate these changing rates?

Thanks.
Invest cash in a longer term CD, treasury, fund or ETF? Yes

In the past, I've gone from 5 to 7 years.
In the future, I'm going to duration match; my average duration will be maybe 10 years from age 76 to 96.
I'm thinking 50/50 TIPS/nominal (treasuries, CD, or the equivalent ETFs)
or maybe 70/30 TIPS/nominal?

I don't go short waiting on rates to change. I tried it years ago and got burned.

Fixed income payout floats my boat.
Last edited by hudson on Sat May 14, 2022 7:16 am, edited 1 time in total.
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Re: When would you invest cash in a longer term CD?

Post by M.Lee »

nisiprius wrote: Fri May 13, 2022 8:38 am I think brokered CDs have interest rate risk and fluctuate in value just like bonds....
Perhaps I misunderstand what you are saying, but I don't think this is true. My understanding is that if one buys a brokered CD that is 'call protected the interest rate/value does not change. The only time one would lose value is if they tried to sell it.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by protagonist »

hudson wrote: Fri May 13, 2022 8:41 pm
water2357 wrote: Fri May 13, 2022 8:31 am So, any thoughts on how to navigate these changing rates?

Thanks.
Invest cash in a longer term CD, treasury, fund or ETF? Yes

In the past, I've gone from 5 to 7 years.
In the future, I'm going to duration match; my average duration will be maybe 10 years from age 76 to 96.
I'm thinking 50/50 TIPS/nominal (treasuries, CD, or the equivalent ETFs)
or maybe 70/30 TIPS/nominal?

I don't go short waiting on rates to change. I tried it years ago and got burned.

Fixed income payout floats my boat.

Is your main purpose for buying Treasuries income PRESERVATION?
And if so, why would you include nominals, rather than all inflation-indexed securities, in an era when interest rates are almost sure to rise and CD and nominal yields don't come anywhere close to matching the inflation rate? Even if the Fed. manages to get inflation under control, even though you may potentially make less money that way, at least you know you will not be losing your shirt in real terms. And if they do get inflation under control you will still have much larger gains earlier on than you would with current CD/nominal rates.

(btw, I am not preaching. I am trying to figure out how to navigate this minefield too....I have a lot of CDs maturing soon.)
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by hudson »

protagonist wrote: Sat May 14, 2022 7:30 am
hudson wrote: Fri May 13, 2022 8:41 pm
water2357 wrote: Fri May 13, 2022 8:31 am So, any thoughts on how to navigate these changing rates?

Thanks.
Invest cash in a longer term CD, treasury, fund or ETF? Yes

In the past, I've gone from 5 to 7 years.
In the future, I'm going to duration match; my average duration will be maybe 10 years from age 76 to 96.
I'm thinking 50/50 TIPS/nominal (treasuries, CD, or the equivalent ETFs)
or maybe 70/30 TIPS/nominal?

I don't go short waiting on rates to change. I tried it years ago and got burned.

Fixed income payout floats my boat.

Is your main purpose for buying Treasuries income PRESERVATION?
And if so, why would you include nominals, rather than all inflation-indexed securities, in an era when interest rates are almost sure to rise and CD and nominal yields don't come anywhere close to matching the inflation rate? Even if the Fed. manages to get inflation under control, even though you may potentially make less money that way, at least you know you will not be losing your shirt in real terms. And if they do get inflation under control you will still have much larger gains earlier on than you would with current CD/nominal rates.

(btw, I am not preaching. I am trying to figure out how to navigate this minefield too....I have a lot of CDs maturing soon.)
Preservation yes...with TIPS
Payout for spending with nominals.

My CDs expire in 21 months. Above is my tentative plan.

Bottom Line: PRESERVATION? mostly

In another discussion, vineviz made a recommendation... viewtopic.php?p=6637386#p6637386
Scroll up to get all the details.
You likely already read that discussion.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by water2357 »

hudson wrote: Fri May 13, 2022 8:41 pm
water2357 wrote: Fri May 13, 2022 8:31 am So, any thoughts on how to navigate these changing rates?

Thanks.
Invest cash in a longer term CD, treasury, fund or ETF? Yes

In the past, I've gone from 5 to 7 years.
In the future, I'm going to duration match; my average duration will be maybe 10 years from age 76 to 96.
I'm thinking 50/50 TIPS/nominal (treasuries, CD, or the equivalent ETFs)
or maybe 70/30 TIPS/nominal?

I don't go short waiting on rates to change. I tried it years ago and got burned.

Fixed income payout floats my boat.
That last line about not going short waiting for rates to change is what I've been wondering about. Also wondering how much of the Fed's future potential rate changes are already reflected in Brokered CD rates, e.g. in a Brokered 3 year CD with a 3.15% rate. Is this a realistic estimate of what a 3 yr CD rate will be at banks by the end of 2022? Or just what those offering brokered CDs are willing to pay now, while they hope to capture some funds now but assume rates will go higher.

It seems that now brokered CDs are being offered in huge lots compared to what was available a year ago. Wondering if these huge offerings are because these brokered CD banks expect rates to increase and want to lock in funds for e.g. 3 years at 3.15% and consider this to be cheap for them? Or does the 3.15% rate seem to be a relatively accuraate reflection of where this rate wll be by next year?
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by hudson »

water2357 wrote: Sun May 15, 2022 6:40 am
hudson wrote: Fri May 13, 2022 8:41 pm
water2357 wrote: Fri May 13, 2022 8:31 am So, any thoughts on how to navigate these changing rates?

Thanks.
Invest cash in a longer term CD, treasury, fund or ETF? Yes

In the past, I've gone from 5 to 7 years.
In the future, I'm going to duration match; my average duration will be maybe 10 years from age 76 to 96.
I'm thinking 50/50 TIPS/nominal (treasuries, CD, or the equivalent ETFs)
or maybe 70/30 TIPS/nominal?

I don't go short waiting on rates to change. I tried it years ago and got burned.

Fixed income payout floats my boat.
That last line about not going short waiting for rates to change is what I've been wondering about. Also wondering how much of the Fed's future potential rate changes are already reflected in Brokered CD rates, e.g. in a Brokered 3 year CD with a 3.15% rate. Is this a realistic estimate of what a 3 yr CD rate will be at banks by the end of 2022? Or just what those offering brokered CDs are willing to pay now, while they hope to capture some funds now but assume rates will go higher.

It seems that now brokered CDs are being offered in huge lots compared to what was available a year ago. Wondering if these huge offerings are because these brokered CD banks expect rates to increase and want to lock in funds for e.g. 3 years at 3.15% and consider this to be cheap for them? Or does the 3.15% rate seem to be a relatively accurate reflection of where this rate wll be by next year?
I'm terrible on predictions. I have no idea what banks or the fed are thinking.
I disregard all of that.
I focus on the deal that I can get when the brokerages open tomorrow morning.
Actually, I have no money to invest tomorrow.
When I do have cash to invest, I'll buy on the same day the money lands in my settlement account. I'll go for the best available. I won't go short.
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Re: When would you invest cash in a longer term CD?

Post by grabiner »

water2357 wrote: Fri May 13, 2022 9:02 am 3 to 5 yr CD rates will most likely rise as 2022 progresses. My question is not about whether one should invest in CDs. It's a question of given you are going to invest in CDs, at what point in time during 2022 through 2023 would you start investing in longer term CDs.
There is no point in waiting; whether your claim is true or false, the market has already adjusted for it. If you need money in five years, you can buy a five-year CD or five-year bond now, or buy a one-year CD or bond now and then buy a four-year CD or bond next year with the proceeds. Bond traders should expect the same return from either strategy, plus the risk premium for investing in the longer-term bond.

Thus, if traders expect yields to rise, you will get a low yield in the first year while waiting, which negates the value of rising yields. If they expect yields to stay the same, you won't gain anything by waiting.
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Re: When would you invest cash in a longer term CD?

Post by Kevin M »

grabiner wrote: Sun May 15, 2022 11:06 am There is no point in waiting; whether your claim is true or false, the market has already adjusted for it. If you need money in five years, you can buy a five-year CD or five-year bond now, or buy a one-year CD or bond now and then buy a four-year CD or bond next year with the proceeds. Bond traders should expect the same return from either strategy, plus the risk premium for investing in the longer-term bond.
According to the ACM and KW term premium models, the term premium can be negative. Currently ACM shows a 5-year term premium of 0.05%, but it was -0.05% as recently as 4/26/2022. The ACM term premium is negative for 6y to 10y Treasuries; 10-year term premium is -0.10%.

For comparison, the average daily 5y term premium since 1961 is 1.02%, and the 10y is 1.57%.

Image

The KW 5y and 10y term premiums currently are positive, but recently have been more negative than the ACM model.

Image

The ACM model is newer, and is a 5-factor model. KW is a 3-factor model.

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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Kevin M »

No recommendation for you, but I have been nibbling at Treasuries lately, out to about 2-year for nominal and 3-year for TIPS.

On 4/11 I got 2.52% for 2-year nominal. On 4/25 I got 2.72% for the same nominal Treasury, so 20 basis points more. The Friday ask yield for this one was 2.59%, 7 basis points higher it was on 4/11.

On 4/11 I got -1.66% for 2-year TIPS. On 5/6 I got -1.41% for same TIPS. On Friday the ask yield for this TIPS was -1.34%. So 2y TIPS yield has increased by about 30 basis points.

On 5/3 I bought 3y TIPS at -0.86%, and on 5/13 I bought same at -0.64%, so an increase of 20 bps in 10 days. On Friday the ask yield for this one was -0.68%, so a bit lower than a couple of days before.

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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by BigJohn »

With current high inflation and uncertainty regarding how long it will take the Fed to get it down, I would not go out 5 years in any form of nominal bond. Maybe non-brokered CDs if you are 100% certain you can withdraw to early in order to reinvest at a higher rate. However, I would never accept “we’ve never done that” as adequate assurance of early withdrawal capability. If you want to go out that far, I think TIPS is the way to go. If it has to be CDs, I’d keep them short duration.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by hudson »

BigJohn wrote: Sun May 15, 2022 2:40 pm With current high inflation and uncertainty regarding how long it will take the Fed to get it down, I would not go out 5 years in any form of nominal bond. Maybe non-brokered CDs if you are 100% certain you can withdraw to early in order to reinvest at a higher rate. However, I would never accept “we’ve never done that” as adequate assurance of early withdrawal capability. If you want to go out that far, I think TIPS is the way to go. If it has to be CDs, I’d keep them short duration.
Going short would seem to be a good move. If I can get around 3%, I'm going to go intermediate or longer.

I like bank CDs, I like brokered CDs more if they pay more. Last week brokered CDs were paying better. That's where I would go.

If you want to go longer, go TIPS? I agree, but if I can get 3%, I'm thinking 50% TIPS and 50% nominal.
(If I was investing for the next 20 years, 70% TIPS and 30% nominal is where I'd go....depending on nominal rates.)
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by water2357 »

Thanks for the additional observations. Leaning toward at least something over 3% now, probably 3 yr term. Still trying to convince myself that some 5 yr may be ok. Last time rates were over 3% it lasted about a minute and then they vanished. Would have liked to have had a bit more in 5 yr at over 3% the last few years, but the opportunity was gone. So, far there is not much additional return for those additional two years. The lack of much of a premium for those additional two years of risk is a bit worrisome, but like the last time 3%+ may vanish anytime. No crystal ball unfortunately.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by protagonist »

hudson wrote: Sat May 14, 2022 7:49 am
protagonist wrote: Sat May 14, 2022 7:30 am
hudson wrote: Fri May 13, 2022 8:41 pm
water2357 wrote: Fri May 13, 2022 8:31 am So, any thoughts on how to navigate these changing rates?

Thanks.
Invest cash in a longer term CD, treasury, fund or ETF? Yes

In the past, I've gone from 5 to 7 years.
In the future, I'm going to duration match; my average duration will be maybe 10 years from age 76 to 96.
I'm thinking 50/50 TIPS/nominal (treasuries, CD, or the equivalent ETFs)
or maybe 70/30 TIPS/nominal?

I don't go short waiting on rates to change. I tried it years ago and got burned.

Fixed income payout floats my boat.

Is your main purpose for buying Treasuries income PRESERVATION?
And if so, why would you include nominals, rather than all inflation-indexed securities, in an era when interest rates are almost sure to rise and CD and nominal yields don't come anywhere close to matching the inflation rate? Even if the Fed. manages to get inflation under control, even though you may potentially make less money that way, at least you know you will not be losing your shirt in real terms. And if they do get inflation under control you will still have much larger gains earlier on than you would with current CD/nominal rates.

(btw, I am not preaching. I am trying to figure out how to navigate this minefield too....I have a lot of CDs maturing soon.)
Preservation yes...with TIPS
Payout for spending with nominals.

My CDs expire in 21 months. Above is my tentative plan.

Bottom Line: PRESERVATION? mostly

In another discussion, vineviz made a recommendation... viewtopic.php?p=6637386#p6637386
Scroll up to get all the details.
You likely already read that discussion.
No, I was unaware of it. Thanks for the reference.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by protagonist »

I have CDs maturing in early July.
I am hoping relatively short term TIPS will break par with inflation by then. Unfortunately they are in a taxable account. But where else can I get anywhere close to 8% yield , backed by the government? Even if inflation is controlled during the TIPS term, at least I will come close to keeping up with inflation.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Kevin M »

protagonist wrote: Tue May 17, 2022 6:21 pm I have CDs maturing in early July.
I am hoping relatively short term TIPS will break par with inflation by then. Unfortunately they are in a taxable account. But where else can I get anywhere close to 8% yield , backed by the government? Even if inflation is controlled during the TIPS term, at least I will come close to keeping up with inflation.
The 1/15/2028 (5.67 years) had a slightly positive ask yield of 0.02% today.

Image

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by protagonist »

Kevin M wrote: Tue May 17, 2022 6:51 pm
protagonist wrote: Tue May 17, 2022 6:21 pm I have CDs maturing in early July.
I am hoping relatively short term TIPS will break par with inflation by then. Unfortunately they are in a taxable account. But where else can I get anywhere close to 8% yield , backed by the government? Even if inflation is controlled during the TIPS term, at least I will come close to keeping up with inflation.
The 1/15/2028 (5.67 years) had a slightly positive ask yield of 0.02% today.

Image

Kevin
Great, thanks, Kevin!
Hopefully by July those yields will be down in the 3 year range. It's hard for me to commit to an investment that is a definite losing proposition in real terms, but even at current 2-3 year yields it seems a lot better than anything else available, so I will probably wind up biting the bullet like you are doing.

I imagine some of the behavioral finance experts on this site would have a lot to say about my reluctance.

At my age it does not seem like buying bonds beyond 5 years to maturity is a really great idea- I like the 2-3 year range.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Kevin M »

protagonist wrote: Tue May 17, 2022 7:10 pm Great, thanks, Kevin!
Hopefully by July those yields will be down in the 3 year range. It's hard for me to commit to an investment that is a definite losing proposition in real terms, but even at current 2-3 year yields it seems a lot better than anything else available, so I will probably wind up biting the bullet like you are doing.

I imagine some of the behavioral finance experts on this site would have a lot to say about my reluctance.

At my age it does not seem like buying bonds beyond 5 years to maturity is a really great idea- I like the 2-3 year range.
The TIPS yield curve is quite steep out to 3-year maturity, with an incremental 70 basis points for extending from 2-year. Extending to 4-year gets you 36 bps, and you only get 16 bps for extending from 4y to 5y. I don't view 0% real as some magic number if I only get a few basis points more for extending to the maturity to get it.

The nominal curve is steep out to 2-year maturity, but flattens out after that.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: When would you invest cash in a longer term CD?

Post by Doc7 »

M.Lee wrote: Sat May 14, 2022 7:09 am
nisiprius wrote: Fri May 13, 2022 8:38 am I think brokered CDs have interest rate risk and fluctuate in value just like bonds....
Perhaps I misunderstand what you are saying, but I don't think this is true. My understanding is that if one buys a brokered CD that is 'call protected the interest rate/value does not change. The only time one would lose value is if they tried to sell it.

You don’t understand what he is saying. Interest rate risk means the value of the CD will fluctuate with interest rate changes - down as rates on similar products rise, and up as rates on similar products decrease.

The value fluctuates just like a bond does. You will only lose principal if you try to sell it, but this is the case of bonds and stock shares also. You are guaranteed the principal value of the CD back if you hold it until maturity but meanwhile the value can and will fluctuate.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by protagonist »

Kevin M wrote: Tue May 17, 2022 8:12 pm
protagonist wrote: Tue May 17, 2022 7:10 pm Great, thanks, Kevin!
Hopefully by July those yields will be down in the 3 year range. It's hard for me to commit to an investment that is a definite losing proposition in real terms, but even at current 2-3 year yields it seems a lot better than anything else available, so I will probably wind up biting the bullet like you are doing.

I imagine some of the behavioral finance experts on this site would have a lot to say about my reluctance.

At my age it does not seem like buying bonds beyond 5 years to maturity is a really great idea- I like the 2-3 year range.
The TIPS yield curve is quite steep out to 3-year maturity, with an incremental 70 basis points for extending from 2-year. Extending to 4-year gets you 36 bps, and you only get 16 bps for extending from 4y to 5y. I don't view 0% real as some magic number if I only get a few basis points more for extending to the maturity to get it.

The nominal curve is steep out to 2-year maturity, but flattens out after that.

Kevin
Yes, I noticed that. I agree with your strategy.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Hector »

Kevin M wrote: Tue May 17, 2022 6:51 pm
protagonist wrote: Tue May 17, 2022 6:21 pm I have CDs maturing in early July.
I am hoping relatively short term TIPS will break par with inflation by then. Unfortunately they are in a taxable account. But where else can I get anywhere close to 8% yield , backed by the government? Even if inflation is controlled during the TIPS term, at least I will come close to keeping up with inflation.
The 1/15/2028 (5.67 years) had a slightly positive ask yield of 0.02% today.

Image

Kevin
These are appreciated ones (you pay more than $1000 for one of them). It would be nice if that was not the case.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by markjk »

water2357 wrote: Mon May 16, 2022 11:11 pm Leaning toward at least something over 3% now, probably 3 yr term. Still trying to convince myself that some 5 yr may be ok. Last time rates were over 3% it lasted about a minute and then they vanished. Would have liked to have had a bit more in 5 yr at over 3% the last few years, but the opportunity was gone. So, far there is not much additional return for those additional two years. The lack of much of a premium for those additional two years of risk is a bit worrisome, but like the last time 3%+ may vanish anytime. No crystal ball unfortunately.
I think you have your answer. I personally started looking at CD again as well. It's been well over a decade since I last owned a CD.

If you ladder starting today at a max 3 year term, you have the opportunity to pick up the rising rates over the next few years as you reinvest the ladder. You could (if it's worth it down the road) then introduce the 4 and 5 year into the ladder. Like you said, no crystal ball but based on where everything stands right now (especially inflation), I'd bet rates continue to rise for the foreseeable future. If the bottom of your ladder is say 6 months or even a year, you have a chance to pick up that longer term CD if the rates continue rising.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by jebmke »

I have no plans to change anything. I target an average duration of 3 years for nominal fixed income holdings. If I want longer duration I turn to Tips.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by 1moreyr »

I am in a similar boat and building a 5 year ladder. after reading this, I am thinking I should go 50% CD and 50% treasury. The treasury is paying a little less but if something goes wrong, they are sellable.. I don't see any way that I could possibly need the money early but it doesn't mean I won't

I am additionally considering parallel ladders, meaning 50K, 50K, 50K (years 2, 3,4,5,) this month and 50k, 50k , 50K (years 2,3,4,5)after the fed rate changes. They will overlap in years but think of it as a DCA approach to interest rates.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Kevin M »

Hector wrote: Tue May 17, 2022 10:55 pm
Kevin M wrote: Tue May 17, 2022 6:51 pm
protagonist wrote: Tue May 17, 2022 6:21 pm I have CDs maturing in early July.
I am hoping relatively short term TIPS will break par with inflation by then. Unfortunately they are in a taxable account. But where else can I get anywhere close to 8% yield , backed by the government? Even if inflation is controlled during the TIPS term, at least I will come close to keeping up with inflation.
The 1/15/2028 (5.67 years) had a slightly positive ask yield of 0.02% today.

Image

Kevin
These are appreciated ones (you pay more than $1000 for one of them). It would be nice if that was not the case.
That's true for every TIPS except the three longest-maturity ones. First, the unadjusted price often is greater than 100, and second, the index ratio due to inflation since issued is positive, and thus increases the amount you pay. Even the 1/15/2032, which will be auction as a re-opening tomorrow, had an adjusted ask price of 102.084505 yesterday.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: When (in 2022 to 2023) would you invest cash in a longer term CD?

Post by Hector »

Kevin M wrote: Wed May 18, 2022 12:38 pm
Hector wrote: Tue May 17, 2022 10:55 pm
Kevin M wrote: Tue May 17, 2022 6:51 pm
protagonist wrote: Tue May 17, 2022 6:21 pm I have CDs maturing in early July.
I am hoping relatively short term TIPS will break par with inflation by then. Unfortunately they are in a taxable account. But where else can I get anywhere close to 8% yield , backed by the government? Even if inflation is controlled during the TIPS term, at least I will come close to keeping up with inflation.
The 1/15/2028 (5.67 years) had a slightly positive ask yield of 0.02% today.

Image

Kevin
These are appreciated ones (you pay more than $1000 for one of them). It would be nice if that was not the case.
That's true for every TIPS except the three longest-maturity ones. First, the unadjusted price often is greater than 100, and second, the index ratio due to inflation since issued is positive, and thus increases the amount you pay. Even the 1/15/2032, which will be auction as a re-opening tomorrow, had an adjusted ask price of 102.084505 yesterday.

Kevin
Thank you. I was thinking about the scenario where one can lose in terms of nominal in case inflation index # is lower at maturity compare to purchase date.
Aside it, I think this is the first time we are seeing positive ask since March 2020.
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