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Yeah, I know, and I thought about it. But this strikes me as that rare, real win-win situation.
Contrast it with something like NTF (aka "free") fund transactions. When NTF trades were introduced, we were told that it was a win-win. Fund companies had significant account servicing costs. Brokerages were designed to provide those same services for less (economies of scale, core business, etc.). So the fund companies would make more money by outsourcing and investors would get more convenience.
That was likely true decades ago, with paper statements, paper application forms, paper checks, etc. But as servicing got cheaper and as the brokerages raised their fees (I think they started at 25 basis points and are now around 40 basis points), this became a big win for brokerages and a loss for investors.
Or contrast with "money back" annuities. These are annuities where, after so many years, if you don't annuitize you get your initial investment returned. "Free"? Hardly. You're paying with opportunity cost over many years.
With CDs, one can reasonably argue that buying through a brokerage is a win-win. You do effectively give up the ability to redeem early, but there are also some CDs sold at banks that are even more restricted. They don't permit early redemption, period. That's even worse than the brokered CDs, which at least purport to have a secondary market.
By the way, last week I bought a 2-yr CD with call-protection (4.7%) from Morgan Stanley. CDs are getting more rewarding now. When they reach 5-6%, they become more attractive than stocks and bonds in coming years.
Also treasuries are catching up to the CD yield. One year treasury is yielding 4.72% as of Wednesday evening. The 3 mo, 6 mo and 9 mo Treasuries are higher than the CDs of the same duration.
@sfative- I chose to take the higher interest rate on that relatively short-term CD, betting that during that time frame rates will not be coming down much, if at all, and that the bank won't exercise the call option.
Since there seems to be some interest in the subject, I'm going to repeat something here that I've said in a private message:
It's pretty much the same approach for CDs, bonds, or Treasuries. In an inflationary cycle such as the one we are now in, when the Fed is is gradually increasing rates, wait a few days after a Fed increase and then check for possible newer higher interest rates, keeping maturities reasonably short, and also keeping cash in reserve.
When it looks like the inflation cycle is coming under control and the Fed is settling down, then deploy all of your remaining available cash, looking for maximum rates, maximum duration, and definitely non-callable.
With a bit of luck, some of the short-term CDs of your ladder will mature prior to that final long-term purchase, giving you more cash to redeploy for the long term.
That should give you a decent income stream for a number of years as inflation decreases and the available rates start coming down. With callable instruments, it's the "coming down" part that will cause issuers to call in their higher-paying notes and refinance at lower rates. Same basic situation as a homeowner refinancing a mortgage at lower rates.
Interest-bearing instruments (CDs, bonds, Treasuries) are more or less a mirror image of a homeowner mortgage. The homeowner is the borrower, looking for the lowest possible rate. An institution borrows by issuing interest-bearing instruments, and is doing the same thing- looking to pay the lowest possible rate.
When it looks like the inflation cycle is coming under control and the Fed is settling down, then deploy all of your remaining available cash, looking for maximum rates, maximum duration, and definitely non-callable.
Since there seems to be some interest in the subject, I'm going to repeat something here that I've said in a private message:
It's pretty much the same approach for CDs, bonds, or Treasuries. In an inflationary cycle such as the one we are now in, when the Fed is is gradually increasing rates, wait a few days after a Fed increase and then check for possible newer higher interest rates, keeping maturities reasonably short, and also keeping cash in reserve.
When it looks like the inflation cycle is coming under control and the Fed is settling down, then deploy all of your remaining available cash, looking for maximum rates, maximum duration, and definitely non-callable.
That should give you a decent income stream for a number of years as inflation decreases and the available rates start coming down. With callable instruments, it's the "coming down" part that will cause issuers to call in their higher-paying notes and refinance at lower rates. Same basic situation as a homeowner refinancing a mortgage at lower rates.
Interest-bearing instruments (CDs, bonds, Treasuries) are more or less a mirror image of a homeowner mortgage. The homeowner is the borrower, looking for the lowest possible rate. An institution borrows by issuing interest-bearing instruments, and is doing the same thing- looking to pay the lowest possible rate.
That make sense and I was thinking the same thing, but I'm also wondering if it might be a better idea to put that money into bond funds rather than CDs or individual bonds, as, in addition to yield, you will make money if interest rates go down as the NAV of bond funds will move higher.
The risk with bond funds is if you guess the move wrong and rates go up. The NAV will drop.
with individual bonds you know you will get back par.
Rather than relying on the CPI, look at your own personal interest rate. If you don't need a new car, and own a house, the inflation rate in these two segments should not influence your investments.
Sitting at home, retired, walking everywhere, it is only energy, tax increases and food that affects my inflation.
Of course, if I was willing to eat cold beans, I could cut it even further!
@Chinfist- "I'm also wondering if it might be a better idea to put that money into bond funds rather than CDs or individual bonds, as, in addition to yield, you will make money if interest rates go down as the NAV of bond funds will move higher. "
I don't like bond funds at all, since there is absolutely no control over actually getting your original investment back. I've been burnt when interest rates go up, and the fund loses value. Also, you have absolutely no control over what bonds your fund chooses to invest in, when they mature, or what their risk profile is.
Yes, I understand that if you want to spend most of your time doing nothing but researching various bond funds, you can control some of those parameters, but life is too short as far as I'm concerned. How many MFO posts over the years have lamented some bad outcome from bond funds which were supposed to be just wonderful, but then fell apart for various reasons?
With Treasuries or FDIC protected CDs you are at least guaranteed to recover your investment, even if the issuing bank goes bust.
Majority of bond funds are down 15%, and the Fed is far from done with raising rate. This also spills over into traditional balanced funds and they sustained double digit loss.
Bank loan funds have the least amount of loss, -3% YTD. That is helping PRWCX, but Giroux now invest 10% in treasury. I considered that is a defensive move. During March 2020 pandemic, bank loan funds fell too until Powell cut rate to near zero. They bounced back ok. During stress time, things can fall at the same time. CDs and short term treasuries held up ok but they paid little at that time.
Right now, buying CD and treasury ladders is unlikely to loss like typical bond funds today, while you can get a respectable return with 4-5% yield.
I think for those who have some history investing in funds, I wouldn't write them off. For some years at the end of the GFC, good active management houses did very, very well, like up to 20% a year, a la Pimco Income. I'll be watching houses like Pimco and DoubleLine to see what and how they're doing, not starting from scratch with a list of dozens of funds to check out. No marriage required to watch a few with an eye to investing a reasonable amount when the time comes.
The market conditions during GFC is quite different from today. The Fed was cutting rate and buying billions of bonds monthly (QE) and it is the opposite today. I invested in Bill Gross’s Pimco Total Return throughout GFC and the Tech Bubble and it did ok.
When inflation is contained and Fed starts to cut rates, it would be prudent to venture back into bond funds again.
The market conditions during GFC is quite different from today.
Hi @Sven. Of course; no two periods are exactly alike. But there's every reason to think there will likely be assets at fire sale prices that good managers can jump on. I agree in the sense that performing non-agency mortgages marked down to ~30c on the dollar with all the liars' loans of the time won't be the big bargain they were then, which set up the reward:risk trade of the decade, and there may not be a repeat of anything like that opportunity.
But there will be bargains, as your last sentence presumably means, hopefully of the baby-out-with-the-bathwater kind, like the subset of mortgages that won big after the GFC.
New agency bond issues at Fido - Federal Home Loans Bank Bonds with maturities of 10 (6.41%) and 12 years (6.61%).
Federal Farm CR Bank Bond will have a coupon rate at 6.98% for a longer dated 15 year.
Would anybody consider these good investments? None are call protected.
Moodys (AAA) and S&P (AA+) have them rated highly, but if we go through another housing bust/hard landing recession, do you still want these? Their yields are attractive, but is it worth dabbling?
In stress time, the asset of bond funds tends to go up since they are considered safe haven to the investors. They serve as the ballast to the declining stocks. So a 60/40 allocation would help many folks to navigate the trouble water, but not this year. Pimco bond funds have a considerable outflow, billions !
My opinion is that the Fed has over-stimulated the market during the pandemic by cutting interest rate to near zero and buying billions of treasury and MBS. They failed to pull back once the economy returned. The market became over-valued and the inflation became a reality late last year. Playing catching-up by raising rate aggressively and doing QT is what we are facing today.
I don’t know when the bonds will become reasonable priced. Trying to time and re-enter the bond is nearly impossible. Additionally, the Fed is planning to raise rate until mid 2023. So I will made lemonade from my lemons.
Additionally, the Fed is planning to raise rate until mid 2023.
If the Fed raises at their next 4 meetings...say 50 bp (Dec 14), 50 bp (Feb 1), 25 bp (Mar 16), 25 bp (May 4).... and are finished at the beginning of May, that is 6 months from now.
But as those increases diminish, could bonds rally in 2Q?
If one sat on a bunch of cash through the current hot mess and is looking for a great yield, the very much reduced bond fundshareprices offer a good entry point, these days. I bought-into junk bonds TUHYX too soon. But as time goes by, the profit rises from month to month as dividends serve to buy new shares at a lower cost.
Step back and look at the Big Picture, and you must admit that OJ is 100% correct. And re: Treasuries? After some of the nightmare difficulties and snafus I've read about right here at MFO about people trying to buy through the gov't website leaves me deciding not to do it on my own. Let uncle David Giroux buy my Treasuries for me.
2022 is a unique year, with QT and rising rates. But remember that the QE and depressed interest rates were a very unusual period of time. We are having a snap-back reaction at the moment, eh? My credit union just emailed an offer for a 30-month CD at 3.25% with a $5k minimum. No thanks. The dividends alone on my junk bond fund is getting me better results than MOST of my stockfunds these days.
Inflation will be sticky. Seems to me we are living through a ratcheted-up New Normal. Raising interest rates is like pushing on a string to move it where you want it to go. The old metaphor.
(Meanwhile, my single-stocks are treating me very well. Maybe I didn't screw-up, this time, with my selections. I'm approaching a level where I will have made up for last year's loss.)
I'm still 25 bonds and 9 foreign stocks and 62 domestic stocks. And 2 cash. Adding small bits to a small stable of single-stocks as I'm able, lately.
@Crash, I buy only I-Bonds at Treasury Direct (TD).
I buy Treasuries in brokerage a/c at Fido, Schwab, and now also at Vanguard (now that it forced me to switch).
There is an additional issue with buying Treasuries at TD - you cannot sell them before maturity. To sell before maturity, you have to transfer Treasuries from TD to a brokerage account and then sell there. So, why not buy them at brokerages to begin with? While short-term Treasuries should be held to maturity, the option to liquidate them at anytime is valuable.
@Crash, I buy only I-Bonds at Treasury Direct (TD).
I buy Treasuries in brokerage a/c at Fido, Schwab, and now also at Vanguard (now that it forced me to switch).
There is an additional issue with buying Treasuries at TD - you cannot sell them before maturity. To sell before maturity, you have to transfer Treasuries from TD to a brokerage account and then sell there. So, why not buy them at brokerages to begin with? While short-term Treasuries should be held to maturity, the option to liquidate them at anytime is valuable.
Agreed. My "sweep" account at TRP brokerage in in PRTXX. I believe those are some kind of Treasury instrument. But I've been using it not to buy and hold there. Instead, I electronically take from my bank account, sent it to PRTXX and then buy stock shares.
"Fido is offering a 5.50% 15 year (Callable) CD - Jonesboro State Bank" @JD_co - In my opinion this is a sucker play. Jonesboro is simply betting that sometime in the next 15 years the going rates will be lower than they are now, at which time they will call, leaving the buyer of the CD out in the cold at that point. Stay away from long-term callable CDs or bonds.
Comments
Contrast it with something like NTF (aka "free") fund transactions. When NTF trades were introduced, we were told that it was a win-win. Fund companies had significant account servicing costs. Brokerages were designed to provide those same services for less (economies of scale, core business, etc.). So the fund companies would make more money by outsourcing and investors would get more convenience.
That was likely true decades ago, with paper statements, paper application forms, paper checks, etc. But as servicing got cheaper and as the brokerages raised their fees (I think they started at 25 basis points and are now around 40 basis points), this became a big win for brokerages and a loss for investors.
Or contrast with "money back" annuities. These are annuities where, after so many years, if you don't annuitize you get your initial investment returned. "Free"? Hardly. You're paying with opportunity cost over many years.
With CDs, one can reasonably argue that buying through a brokerage is a win-win. You do effectively give up the ability to redeem early, but there are also some CDs sold at banks that are even more restricted. They don't permit early redemption, period. That's even worse than the brokered CDs, which at least purport to have a secondary market.
Will keep checking every few days to capture steadily higher rates. Go Fed!
Also treasuries are catching up to the CD yield. One year treasury is yielding 4.72% as of Wednesday evening. The 3 mo, 6 mo and 9 mo Treasuries are higher than the CDs of the same duration.
with individual bonds you know you will get back par.
Rather than relying on the CPI, look at your own personal interest rate. If you don't need a new car, and own a house, the inflation rate in these two segments should not influence your investments.
Sitting at home, retired, walking everywhere, it is only energy, tax increases and food that affects my inflation.
Of course, if I was willing to eat cold beans, I could cut it even further!
"I'm also wondering if it might be a better idea to put that money into bond funds rather than CDs or individual bonds, as, in addition to yield, you will make money if interest rates go down as the NAV of bond funds will move higher. "
I don't like bond funds at all, since there is absolutely no control over actually getting your original investment back. I've been burnt when interest rates go up, and the fund loses value. Also, you have absolutely no control over what bonds your fund chooses to invest in, when they mature, or what their risk profile is.
Yes, I understand that if you want to spend most of your time doing nothing but researching various bond funds, you can control some of those parameters, but life is too short as far as I'm concerned. How many MFO posts over the years have lamented some bad outcome from bond funds which were supposed to be just wonderful, but then fell apart for various reasons?
With Treasuries or FDIC protected CDs you are at least guaranteed to recover your investment, even if the issuing bank goes bust.
Add: Or, listen to yogi, just below.
Or, near the month end, buy 13-wk, 26-wk, 52-wk at Treasury Auctions & 39-wk in the secondary market.
As each matures, roll into 52-wk T-Bill.
Cashflow every 3 mo. Beats m-mkt funds.
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_bill_rates&field_tdr_date_value_month=202211
https://home.treasury.gov/system/files/221/Tentative-Auction-Schedule.pdf
The highest Non-callable CD Fido offers at the moment is 5.0% from Capital One. Its a 5 yr CD.
Note: These are New issue only, not secondary market CD offerings.
Bank loan funds have the least amount of loss, -3% YTD. That is helping PRWCX, but Giroux now invest 10% in treasury. I considered that is a defensive move. During March 2020 pandemic, bank loan funds fell too until Powell cut rate to near zero. They bounced back ok. During stress time, things can fall at the same time. CDs and short term treasuries held up ok but they paid little at that time.
Right now, buying CD and treasury ladders is unlikely to loss like typical bond funds today, while you can get a respectable return with 4-5% yield.
When inflation is contained and Fed starts to cut rates, it would be prudent to venture back into bond funds again.
But there will be bargains, as your last sentence presumably means, hopefully of the baby-out-with-the-bathwater kind, like the subset of mortgages that won big after the GFC.
Federal Farm CR Bank Bond will have a coupon rate at 6.98% for a longer dated 15 year.
Would anybody consider these good investments? None are call protected.
Moodys (AAA) and S&P (AA+) have them rated highly, but if we go through another housing bust/hard landing recession, do you still want these? Their yields are attractive, but is it worth dabbling?
My opinion is that the Fed has over-stimulated the market during the pandemic by cutting interest rate to near zero and buying billions of treasury and MBS. They failed to pull back once the economy returned. The market became over-valued and the inflation became a reality late last year. Playing catching-up by raising rate aggressively and doing QT is what we are facing today.
I don’t know when the bonds will become reasonable priced. Trying to time and re-enter the bond is nearly impossible. Additionally, the Fed is planning to raise rate until mid 2023. So I will made lemonade from my lemons.
But as those increases diminish, could bonds rally in 2Q?
Step back and look at the Big Picture, and you must admit that OJ is 100% correct. And re: Treasuries? After some of the nightmare difficulties and snafus I've read about right here at MFO about people trying to buy through the gov't website leaves me deciding not to do it on my own. Let uncle David Giroux buy my Treasuries for me.
2022 is a unique year, with QT and rising rates. But remember that the QE and depressed interest rates were a very unusual period of time. We are having a snap-back reaction at the moment, eh? My credit union just emailed an offer for a 30-month CD at 3.25% with a $5k minimum. No thanks. The dividends alone on my junk bond fund is getting me better results than MOST of my stock funds these days.
Inflation will be sticky. Seems to me we are living through a ratcheted-up New Normal. Raising interest rates is like pushing on a string to move it where you want it to go. The old metaphor.
(Meanwhile, my single-stocks are treating me very well. Maybe I didn't screw-up, this time, with my selections. I'm approaching a level where I will have made up for last year's loss.)
I'm still 25 bonds and 9 foreign stocks and 62 domestic stocks. And 2 cash. Adding small bits to a small stable of single-stocks as I'm able, lately.
I buy Treasuries in brokerage a/c at Fido, Schwab, and now also at Vanguard (now that it forced me to switch).
There is an additional issue with buying Treasuries at TD - you cannot sell them before maturity. To sell before maturity, you have to transfer Treasuries from TD to a brokerage account and then sell there. So, why not buy them at brokerages to begin with? While short-term Treasuries should be held to maturity, the option to liquidate them at anytime is valuable.
My "sweep" account at TRP brokerage in in PRTXX. I believe those are some kind of Treasury instrument. But I've been using it not to buy and hold there. Instead, I electronically take from my bank account, sent it to PRTXX and then buy stock shares.
@JD_co -
In my opinion this is a sucker play. Jonesboro is simply betting that sometime in the next 15 years the going rates will be lower than they are now, at which time they will call, leaving the buyer of the CD out in the cold at that point. Stay away from long-term callable CDs or bonds.