Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I appreciate your interest in low stress places to put cash for 2-3 years. Different people have different objectives and that leads to different choices - as you said, that is okay.
2-3 year brokered CDs (callable) paying no more than 4.6%. A non-callable 2 year Treasury (coupon 4.25%) is expected to yield 4.3% at auction. In a taxable account, the Treasury note yields a similar amount after tax if your state has an income tax. And it comes without call risk.
Though the Treasury has reinvestment risk every six months on its coupon payment. OTOH, the CD has reinvestment risk on its principal if the CD is called. I find the former less stressful (not much cash is subject to reinvestment risk). You may feel differently - it's a matter of personal preference.
It is true that RPHIX did not return more than 4% before 2023. I suggest that a better way of looking at it is how much it outperformed cash. According to Portfolio Visualizer, it usually beat cash by 3/4% or more, with larger margins coming in years when cash returned under 2%. So it is not surprising that RPHIX has not exceeded 4% until recently. Cash has not exceeded 3% until recently.
The question becomes: what do you expect cash to do? You've answered that. You expect cash to be flat or drop slightly. (Not saying this is right or wrong - no one really knows - just restating your perspective.)
Cash (as represented by 3 mo T-bills) is currently (12/20/24) yielding 4.34%. Lop off another 1/2% (assume the Fed "aggressively" cuts rates), and we're looking at 3.8% next year. Conservatively, add 1/2% for the RPHIX yield. That comes to 4.3%. This is not the worst possible case, but a fair estimate of the worst reasonably possible case.
It looks like RPHIX won't do much worse than a CD and could do better. Should short term rates plummet beyond what I suggested above, then the CD will get called.
Either way, for me I find RPHIX less stressful. Fully liquid and no need for a plan B if the CD is called. You may not care much about those factors (i.e. they don't cause you stress) and find yield volatility vis a vis a CD stressful.
I just finished a 3 year electricity contract - no stress. I'm now on a 9 month contract - more stress. There's something to be said for locking in rates. Everyone is different, and each situation presents its own types of stress.
[CD rates from Schwab and Fidelity. Treasury expected yield from Fidelity.]
msf: "It is true that RPHIX did not return more than 4% before 2023. I suggest that a better way of looking at it is how much it outperformed cash. According to Portfolio Visualizer, it usually beat cash by 3/4% or more, with larger margins coming in years when cash returned under 2%. So it is not surprising that RPHIX has not exceeded 4% until recently. Cash has not exceeded 3% until recently."
msf, there are many low risk bond oefs, that "outperformed cash" in the past couple of years. But even when I was very active bond oef momentum investor, I held my "cash" in MMs or high rate Savings Accounts. RPHIX use to be in my "low risk" bond oef category, but RPHIX has gone through periods of losing principal, which was the case when I dumped it in 2020 with the market crash. RPHIX "risk" is much higher than MMs, CDs, Treasuries, and I will not use it in my portfolio, when I get comparable returns with "lower risk" fixed income alternatives. I would argue that the 2023 and 2024 TR performance of RPHIX are aberrations in the RPHIX performance history, and do not expect that to return anytime soon.
For the purposes of this thread, my maturing CD money will be very briefly in a cash account at my brokerage and bank, but after a very short period of a few days/weeks, it will be re-invested into much less risky options, compared to RPHIX, like noncallable CDs, MMs, treasuries, and maybe a callable CD. I would only use RPHIX if I thought it was going to significantly outperform CDs, MMs, treasuries, etc. who have much lower risk. Of course, others have a much different TR/Risk criteria, but I want to lowest risk option to produce "at least" 4%, and there are several fixed income options to accomplish that with risk lower than RPHIX. Others are encouraged to define their TR/Risk criteria, and dive into low risk bond oefs if it meets their criteria.
For my measly 10% cash position I ended up splitting it 50/50 between Fido’s SPAXX and JAAA.
Can’t get excited about cash, but understand the appeal to some. I’d have to have a much shorter life expectancy then I currently presume not to take a bit of risk in upper tier HY, convertibles, arbitrage, preferred, and short-intermediate duration IG corporates. I don’t like longer dated bonds. It’s not that I think they’re a bad investment. Just that unless you can tell me where rates will be a year or more out, it’s impossible to know what longer dated bonds’ prospects are. Becomes a question of: “Where would you rather assume some risk?”
A great discussion. You guys really get “into the weeds” splicing and dicing the different cash options. Admirable.
BTW - In case you haven’t looked, the 10-Year spiked sharply again today, now above 4.58%.
4% guaranteed interest is our threshold vs bond OEFs. 5+% is pretty much nirvana.
We SOLD ALL bond OEFs when CP CDs reached these ^ levels and have not (yet) turned back. We have a 5-yr, CP CD ladder still yielding a wee bit over 5%.
With interest rates, all investors EVER know are the current rates and the current trends. About a year or so ago, CP CD rates were 5+% and the trend was DOWN.
So we loaded up on them at that time, avoiding the reasonably predictable dilemma faced by CD investors with currently maturing CDs.
Not saying we were right and they were wrong, just saying what our strategy was/is, and that it has worked out exceptionally well for us.
On that note, since FD is invested solely in 'bonds', he can freely take on some risk if he chooses. For someone with exposure to equities, it may be that s/he does not wish to take any additional risk on the bond side. With a baseline of 60% in equity; some of it quite aggressive at times, I fall into that category and have been quite happy with mostly USFR for my individual needs. Different strokes.
raq, That's correct if someone has risky stuff, DT doesn't. I respect DT decisions and his choices.
When I used to own both stocks and bonds, my bond funds were never the "safe" ones. My first bond fund that I bought in 2010 was PIMIX. Then, I prepared for my retirement in 2018. By the end of 2017, PIMIX was over 50% of my portfolio. All my funds must be top performers ALL the time in their category based on risk-adjusted performance.
RPHIX vs MM. I'm with msf. As I said before, when rates fall, and they will eventually, RPHIX would do better.
But, why stop with RPHIX? Let's look at DHEAX+CLOI. For one year...VMFXX(MM) made 5.3%...DHEAX made 9.1%...CLOI 8.2%. Both volatility max loss was -0.5%. See chart (https://schrts.co/zbSQiQxp).
BTW, I've not been in the TR camp for years now. My portfolio volatility is very low, but performance is still good. I'm not arguing about CDs or not; just offering another option. I understand that this thread started as a CD one, but why not discuss the next step, especially when there is not much to talk about CDs?
On that note, since FD is invested solely in 'bonds', he can freely take on some risk if he chooses. For someone with exposure to equities, it may be that s/he does not wish to take any additional risk on the bond side. With a baseline of 60% in equity; some of it quite aggressive at times, I fall into that category and have been quite happy with mostly USFR for my individual needs. Different strokes.
Hi Racq, Nice to see your post and hope you are doing well. You are absolutely correct that each poster/investor is unique in their own ways. I was directing my thread to other similar posters with "maturing CDs", and I was curious as to what CD investors were choosing to do with that cash. But there are no rules on these threads about posts, as long as they are civil. Hope you and your family have safe and enjoyable holidays!
I've invested in so many cash, short term, and fixed rate vehicles that I've lost count. The ones that come to mind are: prime MMFs, government MMFs, Treasury only MMFs, national tax free MMFs, single state MMFs, ultra short bond funds, short term bond funds, short term national muni bond funds, short term single state bond funds, short term government funds, short-intermediate national muni funds, T-bills, short and intermediate CDs, liquid CDs, callable CDs, short term muni bonds, callable muni bonds, SPDAs, and GICs (stable value).
I've used some of these when the idea of losing even a single penny was an anathema to me, and I've used some when I was seeking a better multi-year return. So I appreciate different objectives, especially the concern about share prices declining. (What, you mean I could actually lose money? I've had those thoughts.)
Some people here have said that they would not use a prime MMF - too much risk for the small additional return. Actually, the risk goes further - scores of MMFs have been propped up by their sponsors over the years, including several that would otherwise have broken a buck. Regulations have changed since then; still, prime MMFs remain more risky.
One used to see SNGVX mentioned as a safe short term fund (see, e.g. here) - it never had a losing year. That was before 2021, when it lost almost 1% followed by 2022 when it lost nearly 4.5%. So when it comes to OEF bond fund risks, your concerns are understandable.
ISTM David Sherman manages his short term funds in an unusual if not unique way, resulting in his CrossingBridge funds as well as RPHIX never having had a losing calendar year over their lifetimes. Admittedly, they are not without some volatility as your 2020 experience attests. That you pulled the trigger so quickly then also attests to the great importance you place on preservation of principal.
@stillers wrote: "4% guaranteed interest is our threshold vs bond OEFs. 5+% is pretty much nirvana." That seems to be your thinking as well: "I want to lowest risk option to produce 'at least' 4%." Further, you seem willing to make a multi-year commitment (you're considering callable CDs that if not called, will take several years to mature).
You can get a 3 year fixed annuity with an A rated insurance company yielding over 5%. Depending on your state it may even allow 10% of balance withdrawals without issuer penalty, mitigating liquidity concerns. One does need to be over 59.5 to take withdrawals without tax penalty.
If you want a policy from an AA+ rated insurer, MassMutual is paying around 4.65% for three years, depending on your state of residence. All of these policies have the added benefit of tax deferral (for taxable accounts), including the ability to "roll over" the proceeds (1035 exchange) to extend the deferral period. No loss of principal, "high" rate that cannot drop, some liquidity, and tax deferral. Seems to check all your boxes and more.
Great stuff by @msf on annuities. I agree they are a viable option at this time. Guessing they were even more so about 6-12 months ago when rates were at/near their peaks.
That said, annuities have always been a 4-letter word to us. Too high fees, loss of control over your money, difficult if not impossible to understand terms, etc.
Not saying all of the drawbacks can't be overcome, but any prospective buyer MUST identify and understand all of the many mistakes they can (and others often do) make when buying them. Or things may not go as planned/expected.
EDIT: Barron's does an annual review and report by annuity type that I consider the best on the planet and would absolutely use as our primary guide if ever seriously considering an annuity. (Note: A few years ago we did consider one and passed.) https://www.barrons.com/topics/best-annuities
"No loss of principal, "high" rate that cannot drop, some liquidity, and tax deferral."
Could you please elaborate on your “No loss of principal” comment? I know next to nothing about annuities, except having looked at them superficially about 20 years ago when I was debating about my DB plan and not getting comfortable taking on credit risk of the insurance companies. I probably missed a good opportunity if there was no risk of loss of principal but it is never too late for me to learn and try invest in new things.
Hopefully, YBB will join the annuities conversation with you and stillers, as I recall YBB commenting about annuities over the years.
P.S.: I am yet to read the links posted in both msg and stillers posts and educate myself.
You are absolutely correct that each poster/investor is unique in their own ways. I was directing my thread to other similar posters with "maturing CDs", and I was curious as to what CD investors were choosing to do with that cash. But there are no rules on these threads about posts, as long as they are civil.
As you you like it. But I didn’t get the impression initially your intent was to limit the scope of the thread to CDs and to rule out other types of investments. Perhaps the reference below from your OP was to some “more active” variations of CDs? I don’t invest in CDs, so wouldn’t know.
At 76 years old and happily retired, I have been investing in CDs for the past few years. About 1/3 of my CDs will be maturing in the next month. It appears that the renewal rate, for "noncallable" CDs, will be around 4.3%. That is about 1% lower than the maturing CDs. I am wrestling with renewing at the 4.3% rate, with almost no stress, or jumping back into the more active investing options. Anyone else in a similar situation?
I have followed this thread, but had only 2 short posts on T-Note quotes & FRN USFR.
IMO, good CD alternatives are T-Bills/Notes (noncallable). All these can be held to maturity without incurring losses. The CD & Treasuries investors are quite different from fund investors because funds have duration and they never mature, so there may be gains or losses at sale.
As for annuities, there are basic fixed-term and lifetime SPIA that have low-costs and may be fine for many. Any guarantees are from the insurance company, so stick with highly rated companies.
TIAA offers many low-cost annuities - for retirement or taxable accounts.
A big issue with annuities is that one is stuck with annuity rules - while tax-deferral is good, withdrawal penalties apply before 59.5. Taxes also apply on withdrawals.
Insurers know that & can offer attractive rates to captive clients. They also publicize those offers aggressively along with luring initial incentives.
One can do 1035 exchanges between annuities, but it isn’t a simple online process.
IMO, first exhaust all other tax-deferral options - IRAs, 401k/403b, 529, etc. When these options weren’t available, annuities were very popular.
There is the risk of the insurer issuing the annuity going under, just as there is the risk of a bank failing. In the case of a bank failure, a government agency (FDIC) steps in, tries to get another bank to assume your bank's liabilities. If it succeeds (almost all the time), you may be forced to choose between taking you money (including interest to date) and running, or accepting a lower return for the remainder of the time on your CD.
In the case of an insurer (the issuer of your annuity) failing, it is a state government agency that steps in. As with banks, states first try to "rehabilitate" insurers - either get them back on their feet or have another insurer take over their liabilities. Should they not succeed, the insurer is liquidated.
Here's Pennsylvania's general description (not state-specific) on how that proceeds. A state-created guaranty association pays for losses not to exceed state limits. Again, similar to what the FDIC does for banks. A key difference is that state guaranty associations are typically underfunded. So it is important to stick with better rated insurers. (Rehabilitation/liquidation is to be avoided in any case.)
Single Premium Deferred (fixed) Annuities are rather simple vehicles if one does not annuitize (i.e. one uses them like CDs). The key numbers are: - guarantee rate, - number of years rate is guaranteed, - floor for annual renewal rate after that (insurer might offer more depending on market), - penalty each year for early withdrawal (e.g. 7% in year 1, 6% in year 2); - amount/percentage that can be withdrawn annually without penalty
There should not be a penalty for withdrawing everything once the multiyear guarantee period is past.
Something that has been added in the past decade or two is MVA - market value adjustments. Suppose interest rates have gone up since you purchased your annuity. Then, like a bond, the value of your annuity has dropped. If you close out your annuity early (effectively "putting" your policy), you are forcing the insurer to overpay (i.e. pay 100% of face value minus any early redemption charges). MVA lets the insurer adjust the payout accordingly, so that it doesn't overpay.
Conversely, if interest rates drop, your annuity is worth more than face value (plus interest). MVA adjusts the payout upward, so you "win". Many annuities but not all these days come with MVA. https://smartasset.com/financial-advisor/market-value-adjustment
MVA seems to enable insurers to issue policies that pay a bit more. But they're shifting market risk onto you, in case you redeem early.
Here are Mass Mutual's rate sheets for its 3-5 year Stable Voyage Policies (no MVA) and for its Premier Voyage Policies (with MVA). The latter have higher rates, e.g. 4.25% or 4.35% on policies under $100K, while the Stable Voyage Policies (no MVA) pay 4.2%.
"Any guarantees are from the insurance company, so stick with highly rated companies."
If the guarantee we are relying on is the insurance company's credit rating, why not look at their or other corporate bonds as well or do annuity products come with some other credit enhancement features that make them safer than bonds (say, unsecured bonds)?
Recently, before the recent climb in 10 yr rates, a few MFO posters bought 2-year call protected 10 yr bonds from DB (A rated) for a 5.7+% yield. They are not CDs but I thought as corporate bonds, they were good.
If I were the OP, I would also consider Agencies, in addition to Treasuries. Unfortunately, most of them are call protected only for six months or so but I will not complain a near 6% yield for a 10 yr Agency when available - none this minute. Just look out for them. I buy them at Fidelity where it is easy to find them to buy.
Edit: I saw and read msf's post after I posted the above.
If the only guarantee is from their credit rating, why not look at their or other corporate bonds as well or do annuity products come with some other credit enhancement features that make them better?
I wrote:
In the case of an insurer (the issuer of your annuity) failing, it is a state government agency that steps in. As with banks, states first try to "rehabilitate" insurers - either get them back on their feet or have another insurer take over their liabilities. Should they not succeed, the insurer is liquidated.
... A state-created guaranty association pays for losses not to exceed state limits. Again, similar to what the FDIC does for banks
Bond rating and insurer ratings have very different criteria. And different things happen in cases of failures.
If a company issuing bond goes under, bond investors are in line with other creditors depending on where the bond is in the capital structure. They can get something or nothing.
If an insurer goes under, its state regulator works as the lead regulator with the other state regulators to come up with a rescue/rehabilitation plan.
State regulators don't have ready reserves to pay out like the (underfunded) FDIC does for banks.
So, a failed bank may be shut on Friday and account access may resume on Monday. Forget about anything like that for failed insurers.
When my 403b plan insurance MBL-NJ went under (I think with AAA rating & 150 years of existence), all of our 403b annuity accounts were frozen. We could immediately withdraw/shift at 40% haircut (i.e receive 60c for $1), or wait for things to settle. While waiting, the frozen funds earned m-mkt rates that were about half of what MBL was paying. The money was unfrozen after 4-5 years. Technically, there was no loss, but only the lost opportunity. In my asset allocation at the time, I treated this frozen money as forced-cash.
Good to know a AAA insurance company can keep one up at night for years.
During GFC, I had many times over the FDIC limit in a savings account at a money center bank. I did not lose any sleep because I know this industry but I never had an opportunity to know the insurance industry the same way. So, understanding risks goes a long way in one's risk assumption and risk diversification.
An insurer can "fail" without ever being insolvent.
Never underestimate the ignorance of the investing public.
In 1991, Executive Life Insurance Company of New York (ELNY), the stressed but solvent subsidiary of its insolvent parent, Executive Life Insurance Company of California, was placed in rehabilitation in New York to protect it from cash surrenders becoming “a run on the bank.” ... When ELNY’s parent was placed in receivership in California, the New York Insurance Department determined that an “increase in surrenders had caused a material erosion of ELNY’s assets to the detriment of policyholders with nonsurrenderable policies, primarily structured settlement annuities.” As a result, New York’s Superintendent of Insurance sought and obtained an order of rehabilitation in April 1991
It may not have been a "run", perhaps more of a fast walk, but investors spooked by problems with the parent company created a problem with ELNY that otherwise wouldn't have existed.
New York State regulates insurers more stringently than does the rest of the country. Insurers' investments can't be as risky, capital requirements are higher, and so on. This is the reason why you often see insurers operate in 49 states with a separate subsidiary in New York. Insurance companies don't want to be held to New York's higher safety standards in the rest of the country. https://www.jstor.org/stable/253661 (Login via library/school required)
As far as the deferred annuities were concerned,
A year later, in March 1992, ... ELNY’s traditional whole life, term life and deferred annuity books of business were transferred to Metropolitan Life Insurance Company with substantially all the supporting statutory reserve assets. ... Neither the 1991 rehabilitation order or the 1992 order approving the rehabilitation plan declared ELNY to be insolvent.
I thought I would revisit the option of Callable CDs, what Banks are communicating about CD rates, and the merits of including them in your CD investment selections. At Schwab, major banks are offering long term callable CDs (18 month, 2 year, 3 year) of 4.4 and 4.5%, with the first callable date in July of 25. That tells me, I can get the equivalent of .3 to .4% more than a noncallable 6 month CD at Schwab. If the Bank does NOT call it in July of 25, you will continue to receive the 4.4 to 4.5% interest rate until they do call it.
For noncallable CDs at Schwab, major banks are offering 4% long term rates, so the Banks appear somewhat confident that interest rates will not drop below 4% for the next few years? I don't understand Banks offering callable CDs at these rates, if CD rates were expected to continue their rapid decline of the past year, as some posters are projecting?
So I am revisiting my position of "only" using noncallable CDs, and the risk/rewards of investing in higher rate Callable CDs, at a rate that you can only depend on for the next 6 months, but you may end up getting that higher rate for a longer period of time at the higher rate. I am taking the Feds statements that the rapid reduction of interest rates that we have seen in 2024, will likely not continue in 2025, and we may not see any interest rate declines in 2025.
FD, I get your position. You are not a CD investor, you will never be a CD investor, and you will continue your trading approach that does not include CDs, which requires liquidity in your holdings. My original post was directed toward existing CD investors, deciding what those particular investors will do with their maturing CDs, not directed toward investors who will never hold CDs. If you want to "convert" the rest of us CD sinners, you will do it without restraint on this thread.
”If you want to "convert" the rest of us CD sinners, you will do it without restraint on this thread.”
LOL - Good one.
MFO is open to many forms of investing for sure. And different types of investments work together to create whatever perfect harmony one conjectures. Yet, the comment (and others by this poster) does make one wonder if there is (or ever was) an open forum on which only CDs were discussed by various participants?
Snooze!
I find myself in rare agreement with FD1000 on a lot of what he says. Come next recession and bonds should prosper. The problem is in figuring out how high yields may climb before the inevitable reversal.
One definitely needs to balance performance with opportunity costs. When I made that calculation, it was worthwhile for me to invest in MYGAs (Multi-Year Guaranteed Annuities) with guaranteed annual returns of 6%, 6.35%, and 6.5% for three, seven, and five years, respectively. Unless I withdraw funds from them, the returns are also tax-deferred which allows me to plan withdrawals or let them ride to maturity as suits my situation.
At Schwab, major banks are offering long term callable CDs (18 month, 2 year, 3 year) of 4.4 and 4.5%, with the first callable date in July of 25. That tells me, I can get the equivalent of .3 to .4% more than a noncallable 6 month CD at Schwab. If the Bank does NOT call it in July of 25, you will continue to receive the 4.4 to 4.5% interest rate until they do call it.
For callable CDs at Schwab, major banks are offering 4% long term rates, so the Banks appear somewhat confident that interest rates will not drop below 4% for the next few years? I don't understand Banks offering callable CDs at these rates, if CD rates were expected to continue their rapid decline of the past year, as some posters are projecting?
One way to think of callable CDs is not as 2 year loans with a call option exercisable in 6 months but as 6 month loans (to the bank) with a put option held by the bank (on a 1.5 year loan) exercisable in 6 months. IOW, the bank is paying you about 1/4% extra interest over six months in order to have the option to "force" you to loan them money at a predetermined rate (say, 4.5%).
The bank is betting that mid-to-long term interest rates will go up, and it is willing to pay you a sweetener on a 6 month CD in order to lock in that 4.5% rate. Banks aren't always right, though one should look carefully before betting against them.
Regarding 10 year rates, Schwab writes:
With the potential for fewer Fed rate cuts and a higher deficit to fund, investors could reasonably demand more yield to compensate for those risks. A return to the average of the historical range could add as much as another 50 basis points to 10-year Treasury yields, all else being equal. That would mean an estimate for 10-year yields of near 5%. Hence, we are cautious about duration because the risks for long-term yields appear skewed to the upside.
Everyone expects "cash" (fed funds rate) to drop 25-50 basis points. What happens with rates for periods between 0-years and 10-years may be up for grabs. If they drop, buying a callable CD may leave you with the added "sweetener" and a reinvestment task in six months. (The CD gets called.) If these rates rise, there will be an opportunity cost (you're "stuck" at 4.5%). But that's okay if you're satisfied with the rate.
Here's an interesting way to hedge your bets at a cost of course. You can lock in a 4.21% APY for a year where you (not the bank) control what happens - you can add money (no limit) if rates decline, or withdraw money (up to two withdrawals).
Credit Human (an NCUA insured credit union) is offering a Liquid Share Certificate with those terms.
Does any of this matter? Not a lot, not really. One can slice and dice the risk between lender and bank in a variety of ways and with a range of costs ("sweeteners"). But in the next year or so, it may not make a whole lot of difference. That is, the variations are endless, but the risks and rewards being moved around may turn out to be relatively small.
(Credit Human also offers 19-23 month CDs with APY of 4.4% without call risk.)
Personally, I'm content leaving cash in MMFs (or very short T-bills) for a couple of months to see how the markets shake out after Jan 20th.
People may not have noticed that muni MMFs have been soaring of late, especially NY. Schwab's $1M min version, SNYXX, has a 7 day yield of 3.49% (APY 3.56%), its retail version, SWYXX has a 3.34% yield (APY 3.40%), and Fidelity's $25K min version FSNXX is at 3.28% (3.33% APY). That 3.3% is worth about 4.8% APY in a CD for someone in NYC in the 22% tax bracket. And its yield is rising.
Play the game, add a small amount of return and more stress. Settle on a fixed rate for a few months or a couple of years, and relax more. If you're not into the hunt, the latter may be the better path.
Comments
2-3 year brokered CDs (callable) paying no more than 4.6%. A non-callable 2 year Treasury (coupon 4.25%) is expected to yield 4.3% at auction. In a taxable account, the Treasury note yields a similar amount after tax if your state has an income tax. And it comes without call risk.
Though the Treasury has reinvestment risk every six months on its coupon payment. OTOH, the CD has reinvestment risk on its principal if the CD is called. I find the former less stressful (not much cash is subject to reinvestment risk). You may feel differently - it's a matter of personal preference.
It is true that RPHIX did not return more than 4% before 2023. I suggest that a better way of looking at it is how much it outperformed cash. According to Portfolio Visualizer, it usually beat cash by 3/4% or more, with larger margins coming in years when cash returned under 2%. So it is not surprising that RPHIX has not exceeded 4% until recently. Cash has not exceeded 3% until recently.
Portfolio Visualizer comparing RPHIX and ^CASHUS.
The question becomes: what do you expect cash to do? You've answered that. You expect cash to be flat or drop slightly. (Not saying this is right or wrong - no one really knows - just restating your perspective.)
Cash (as represented by 3 mo T-bills) is currently (12/20/24) yielding 4.34%. Lop off another 1/2% (assume the Fed "aggressively" cuts rates), and we're looking at 3.8% next year. Conservatively, add 1/2% for the RPHIX yield. That comes to 4.3%. This is not the worst possible case, but a fair estimate of the worst reasonably possible case.
It looks like RPHIX won't do much worse than a CD and could do better. Should short term rates plummet beyond what I suggested above, then the CD will get called.
Either way, for me I find RPHIX less stressful. Fully liquid and no need for a plan B if the CD is called. You may not care much about those factors (i.e. they don't cause you stress) and find yield volatility vis a vis a CD stressful.
I just finished a 3 year electricity contract - no stress. I'm now on a 9 month contract - more stress. There's something to be said for locking in rates. Everyone is different, and each situation presents its own types of stress.
[CD rates from Schwab and Fidelity. Treasury expected yield from Fidelity.]
msf, there are many low risk bond oefs, that "outperformed cash" in the past couple of years. But even when I was very active bond oef momentum investor, I held my "cash" in MMs or high rate Savings Accounts. RPHIX use to be in my "low risk" bond oef category, but RPHIX has gone through periods of losing principal, which was the case when I dumped it in 2020 with the market crash. RPHIX "risk" is much higher than MMs, CDs, Treasuries, and I will not use it in my portfolio, when I get comparable returns with "lower risk" fixed income alternatives. I would argue that the 2023 and 2024 TR performance of RPHIX are aberrations in the RPHIX performance history, and do not expect that to return anytime soon.
For the purposes of this thread, my maturing CD money will be very briefly in a cash account at my brokerage and bank, but after a very short period of a few days/weeks, it will be re-invested into much less risky options, compared to RPHIX, like noncallable CDs, MMs, treasuries, and maybe a callable CD. I would only use RPHIX if I thought it was going to significantly outperform CDs, MMs, treasuries, etc. who have much lower risk. Of course, others have a much different TR/Risk criteria, but I want to lowest risk option to produce "at least" 4%, and there are several fixed income options to accomplish that with risk lower than RPHIX. Others are encouraged to define their TR/Risk criteria, and dive into low risk bond oefs if it meets their criteria.
Can’t get excited about cash, but understand the appeal to some. I’d have to have a much shorter life expectancy then I currently presume not to take a bit of risk in upper tier HY, convertibles, arbitrage, preferred, and short-intermediate duration IG corporates. I don’t like longer dated bonds. It’s not that I think they’re a bad investment. Just that unless you can tell me where rates will be a year or more out, it’s impossible to know what longer dated bonds’ prospects are. Becomes a question of: “Where would you rather assume some risk?”
A great discussion. You guys really get “into the weeds” splicing and dicing the different cash options.
Admirable.
BTW - In case you haven’t looked, the 10-Year spiked sharply again today, now above 4.58%.
4% guaranteed interest is our threshold vs bond OEFs. 5+% is pretty much nirvana.
We SOLD ALL bond OEFs when CP CDs reached these ^ levels and have not (yet) turned back. We have a 5-yr, CP CD ladder still yielding a wee bit over 5%.
With interest rates, all investors EVER know are the current rates and the current trends. About a year or so ago, CP CD rates were 5+% and the trend was DOWN.
So we loaded up on them at that time, avoiding the reasonably predictable dilemma faced by CD investors with currently maturing CDs.
Not saying we were right and they were wrong, just saying what our strategy was/is, and that it has worked out exceptionally well for us.
That's correct if someone has risky stuff, DT doesn't. I respect DT decisions and his choices.
When I used to own both stocks and bonds, my bond funds were never the "safe" ones. My first bond fund that I bought in 2010 was PIMIX. Then, I prepared for my retirement in 2018. By the end of 2017, PIMIX was over 50% of my portfolio.
All my funds must be top performers ALL the time in their category based on risk-adjusted performance.
RPHIX vs MM. I'm with msf. As I said before, when rates fall, and they will eventually, RPHIX would do better.
But, why stop with RPHIX? Let's look at DHEAX+CLOI. For one year...VMFXX(MM) made 5.3%...DHEAX made 9.1%...CLOI 8.2%. Both volatility max loss was -0.5%. See chart (https://schrts.co/zbSQiQxp).
BTW, I've not been in the TR camp for years now. My portfolio volatility is very low, but performance is still good. I'm not arguing about CDs or not; just offering another option. I understand that this thread started as a CD one, but why not discuss the next step, especially when there is not much to talk about CDs?
I've used some of these when the idea of losing even a single penny was an anathema to me, and I've used some when I was seeking a better multi-year return. So I appreciate different objectives, especially the concern about share prices declining. (What, you mean I could actually lose money? I've had those thoughts.)
Some people here have said that they would not use a prime MMF - too much risk for the small additional return. Actually, the risk goes further - scores of MMFs have been propped up by their sponsors over the years, including several that would otherwise have broken a buck. Regulations have changed since then; still, prime MMFs remain more risky.
https://libertystreeteconomics.newyorkfed.org/2013/10/twenty-eight-money-market-funds-that-could-have-broken-the-buck-new-data-on-losses-during-the-2008-c/
One used to see SNGVX mentioned as a safe short term fund (see, e.g. here) - it never had a losing year. That was before 2021, when it lost almost 1% followed by 2022 when it lost nearly 4.5%. So when it comes to OEF bond fund risks, your concerns are understandable.
ISTM David Sherman manages his short term funds in an unusual if not unique way, resulting in his CrossingBridge funds as well as RPHIX never having had a losing calendar year over their lifetimes. Admittedly, they are not without some volatility as your 2020 experience attests. That you pulled the trigger so quickly then also attests to the great importance you place on preservation of principal.
@stillers wrote: "4% guaranteed interest is our threshold vs bond OEFs. 5+% is pretty much nirvana." That seems to be your thinking as well: "I want to lowest risk option to produce 'at least' 4%." Further, you seem willing to make a multi-year commitment (you're considering callable CDs that if not called, will take several years to mature).
Based on that, welcome to nirvana. Another poster mentioned MYGAs, aka fixed rate SPDAs.
https://www.blueprintincome.com/fixed-annuities-cd-comparison (fixed annuities vs. CDs)
You can get a 3 year fixed annuity with an A rated insurance company yielding over 5%. Depending on your state it may even allow 10% of balance withdrawals without issuer penalty, mitigating liquidity concerns. One does need to be over 59.5 to take withdrawals without tax penalty.
If you want a policy from an AA+ rated insurer, MassMutual is paying around 4.65% for three years, depending on your state of residence. All of these policies have the added benefit of tax deferral (for taxable accounts), including the ability to "roll over" the proceeds (1035 exchange) to extend the deferral period. No loss of principal, "high" rate that cannot drop, some liquidity, and tax deferral. Seems to check all your boxes and more.
That said, annuities have always been a 4-letter word to us. Too high fees, loss of control over your money, difficult if not impossible to understand terms, etc.
Not saying all of the drawbacks can't be overcome, but any prospective buyer MUST identify and understand all of the many mistakes they can (and others often do) make when buying them. Or things may not go as planned/expected.
Here's some primer links in the event anyone here is so inclined. If it's our money, I wouldn't stop with reading just these:
https://annuityguys.org/five-annuity-mistakes-you-should-avoid/
https://www.investopedia.com/articles/investing/022316/5-mistakes-avoid-when-shopping-annuities.asp
https://www.neamb.com/retirement-planning/7-common-annuity-mistakes-and-how-to-avoid-them
EDIT: Barron's does an annual review and report by annuity type that I consider the best on the planet and would absolutely use as our primary guide if ever seriously considering an annuity.
(Note: A few years ago we did consider one and passed.)
https://www.barrons.com/topics/best-annuities
"No loss of principal, "high" rate that cannot drop, some liquidity, and tax deferral."
Could you please elaborate on your “No loss of principal” comment? I know next to nothing about annuities, except having looked at them superficially about 20 years ago when I was debating about my DB plan and not getting comfortable taking on credit risk of the insurance companies. I probably missed a good opportunity if there was no risk of loss of principal but it is never too late for me to learn and try invest in new things.
Hopefully, YBB will join the annuities conversation with you and stillers, as I recall YBB commenting about annuities over the years.
P.S.: I am yet to read the links posted in both msg and stillers posts and educate myself.
Thanks.
As you you like it. But I didn’t get the impression initially your intent was to limit the scope of the thread to CDs and to rule out other types of investments. Perhaps the reference below from your OP was to some “more active” variations of CDs? I don’t invest in CDs, so wouldn’t know.
IMO, good CD alternatives are T-Bills/Notes (noncallable). All these can be held to maturity without incurring losses. The CD & Treasuries investors are quite different from fund investors because funds have duration and they never mature, so there may be gains or losses at sale.
As for annuities, there are basic fixed-term and lifetime SPIA that have low-costs and may be fine for many. Any guarantees are from the insurance company, so stick with highly rated companies.
TIAA offers many low-cost annuities - for retirement or taxable accounts.
A big issue with annuities is that one is stuck with annuity rules - while tax-deferral is good, withdrawal penalties apply before 59.5. Taxes also apply on withdrawals.
Insurers know that & can offer attractive rates to captive clients. They also publicize those offers aggressively along with luring initial incentives.
One can do 1035 exchanges between annuities, but it isn’t a simple online process.
IMO, first exhaust all other tax-deferral options - IRAs, 401k/403b, 529, etc. When these options weren’t available, annuities were very popular.
https://www.blueprintincome.com/fixed-annuities-cd-comparison
There is the risk of the insurer issuing the annuity going under, just as there is the risk of a bank failing. In the case of a bank failure, a government agency (FDIC) steps in, tries to get another bank to assume your bank's liabilities. If it succeeds (almost all the time), you may be forced to choose between taking you money (including interest to date) and running, or accepting a lower return for the remainder of the time on your CD.
In the case of an insurer (the issuer of your annuity) failing, it is a state government agency that steps in. As with banks, states first try to "rehabilitate" insurers - either get them back on their feet or have another insurer take over their liabilities. Should they not succeed, the insurer is liquidated.
Here's Pennsylvania's general description (not state-specific) on how that proceeds. A state-created guaranty association pays for losses not to exceed state limits. Again, similar to what the FDIC does for banks. A key difference is that state guaranty associations are typically underfunded. So it is important to stick with better rated insurers. (Rehabilitation/liquidation is to be avoided in any case.)
Pennsylvania FAQ on insurance company liquidations
Single Premium Deferred (fixed) Annuities are rather simple vehicles if one does not annuitize (i.e. one uses them like CDs). The key numbers are:
- guarantee rate,
- number of years rate is guaranteed,
- floor for annual renewal rate after that (insurer might offer more depending on market),
- penalty each year for early withdrawal (e.g. 7% in year 1, 6% in year 2);
- amount/percentage that can be withdrawn annually without penalty
There should not be a penalty for withdrawing everything once the multiyear guarantee period is past.
Something that has been added in the past decade or two is MVA - market value adjustments. Suppose interest rates have gone up since you purchased your annuity. Then, like a bond, the value of your annuity has dropped. If you close out your annuity early (effectively "putting" your policy), you are forcing the insurer to overpay (i.e. pay 100% of face value minus any early redemption charges). MVA lets the insurer adjust the payout accordingly, so that it doesn't overpay.
Conversely, if interest rates drop, your annuity is worth more than face value (plus interest). MVA adjusts the payout upward, so you "win". Many annuities but not all these days come with MVA.
https://smartasset.com/financial-advisor/market-value-adjustment
MVA seems to enable insurers to issue policies that pay a bit more. But they're shifting market risk onto you, in case you redeem early.
Here are Mass Mutual's rate sheets for its 3-5 year Stable Voyage Policies (no MVA) and for its Premier Voyage Policies (with MVA). The latter have higher rates, e.g. 4.25% or 4.35% on policies under $100K, while the Stable Voyage Policies (no MVA) pay 4.2%.
Stable Voyage rate sheet (Dec 30th)
Premier Voyage rate sheet (Dec 30th)
Important: These rates are dated Dec 30th. They are less than the rates I found quoted today. So rates on these annuities are about to drop.
If the guarantee we are relying on is the insurance company's credit rating, why not look at their or other corporate bonds as well or do annuity products come with some other credit enhancement features that make them safer than bonds (say, unsecured bonds)?
Recently, before the recent climb in 10 yr rates, a few MFO posters bought 2-year call protected 10 yr bonds from DB (A rated) for a 5.7+% yield. They are not CDs but I thought as corporate bonds, they were good.
If I were the OP, I would also consider Agencies, in addition to Treasuries. Unfortunately, most of them are call protected only for six months or so but I will not complain a near 6% yield for a 10 yr Agency when available - none this minute. Just look out for them. I buy them at Fidelity where it is easy to find them to buy.
Edit: I saw and read msf's post after I posted the above.
I wrote:
In the case of an insurer (the issuer of your annuity) failing, it is a state government agency that steps in. As with banks, states first try to "rehabilitate" insurers - either get them back on their feet or have another insurer take over their liabilities. Should they not succeed, the insurer is liquidated.
... A state-created guaranty association pays for losses not to exceed state limits. Again, similar to what the FDIC does for banks
If a company issuing bond goes under, bond investors are in line with other creditors depending on where the bond is in the capital structure. They can get something or nothing.
If an insurer goes under, its state regulator works as the lead regulator with the other state regulators to come up with a rescue/rehabilitation plan.
State regulators don't have ready reserves to pay out like the (underfunded) FDIC does for banks.
So, a failed bank may be shut on Friday and account access may resume on Monday. Forget about anything like that for failed insurers.
When my 403b plan insurance MBL-NJ went under (I think with AAA rating & 150 years of existence), all of our 403b annuity accounts were frozen. We could immediately withdraw/shift at 40% haircut (i.e receive 60c for $1), or wait for things to settle. While waiting, the frozen funds earned m-mkt rates that were about half of what MBL was paying. The money was unfrozen after 4-5 years. Technically, there was no loss, but only the lost opportunity. In my asset allocation at the time, I treated this frozen money as forced-cash.
Thanks for the perspective.
Good to know a AAA insurance company can keep one up at night for years.
During GFC, I had many times over the FDIC limit in a savings account at a money center bank. I did not lose any sleep because I know this industry but I never had an opportunity to know the insurance industry the same way. So, understanding risks goes a long way in one's risk assumption and risk diversification.
Never underestimate the ignorance of the investing public. https://www.pbnylaw.com/articles/THE TROUBLE WITH ELNY.pdf
It may not have been a "run", perhaps more of a fast walk, but investors spooked by problems with the parent company created a problem with ELNY that otherwise wouldn't have existed.
New York State regulates insurers more stringently than does the rest of the country. Insurers' investments can't be as risky, capital requirements are higher, and so on. This is the reason why you often see insurers operate in 49 states with a separate subsidiary in New York. Insurance companies don't want to be held to New York's higher safety standards in the rest of the country.
https://www.jstor.org/stable/253661 (Login via library/school required)
As far as the deferred annuities were concerned,
For noncallable CDs at Schwab, major banks are offering 4% long term rates, so the Banks appear somewhat confident that interest rates will not drop below 4% for the next few years? I don't understand Banks offering callable CDs at these rates, if CD rates were expected to continue their rapid decline of the past year, as some posters are projecting?
So I am revisiting my position of "only" using noncallable CDs, and the risk/rewards of investing in higher rate Callable CDs, at a rate that you can only depend on for the next 6 months, but you may end up getting that higher rate for a longer period of time at the higher rate. I am taking the Feds statements that the rapid reduction of interest rates that we have seen in 2024, will likely not continue in 2025, and we may not see any interest rate declines in 2025.
Vanguard 10 years estimates (https://advisors.vanguard.com/insights/article/series/market-perspectives)
If the above is correct, I prefer to be in bonds and make just 6%.
Someone in 20/80 (stocks/bonds), can have similar performance to 50/50, but with much lower volatility.
"These probabilistic return assumptions depend on current market conditions and, as such, may change over time".
LOL - Good one.
MFO is open to many forms of investing for sure. And different types of investments work together to create whatever perfect harmony one conjectures. Yet, the comment (and others by this poster) does make one wonder if there is (or ever was) an open forum on which only CDs were discussed by various participants?
Snooze!
I find myself in rare agreement with FD1000 on a lot of what he says. Come next recession and bonds should prosper. The problem is in figuring out how high yields may climb before the inevitable reversal.
Hey, it takes time to compose
The bank is betting that mid-to-long term interest rates will go up, and it is willing to pay you a sweetener on a 6 month CD in order to lock in that 4.5% rate. Banks aren't always right, though one should look carefully before betting against them.
Regarding 10 year rates, Schwab writes: https://www.schwab.com/learn/story/fixed-income-outlook (Dec 4)
Everyone expects "cash" (fed funds rate) to drop 25-50 basis points. What happens with rates for periods between 0-years and 10-years may be up for grabs. If they drop, buying a callable CD may leave you with the added "sweetener" and a reinvestment task in six months. (The CD gets called.) If these rates rise, there will be an opportunity cost (you're "stuck" at 4.5%). But that's okay if you're satisfied with the rate.
Here's an interesting way to hedge your bets at a cost of course. You can lock in a 4.21% APY for a year where you (not the bank) control what happens - you can add money (no limit) if rates decline, or withdraw money (up to two withdrawals).
Credit Human (an NCUA insured credit union) is offering a Liquid Share Certificate with those terms.
Does any of this matter? Not a lot, not really. One can slice and dice the risk between lender and bank in a variety of ways and with a range of costs ("sweeteners"). But in the next year or so, it may not make a whole lot of difference. That is, the variations are endless, but the risks and rewards being moved around may turn out to be relatively small.
(Credit Human also offers 19-23 month CDs with APY of 4.4% without call risk.)
Personally, I'm content leaving cash in MMFs (or very short T-bills) for a couple of months to see how the markets shake out after Jan 20th.
People may not have noticed that muni MMFs have been soaring of late, especially NY. Schwab's $1M min version, SNYXX, has a 7 day yield of 3.49% (APY 3.56%), its retail version, SWYXX has a 3.34% yield (APY 3.40%), and Fidelity's $25K min version FSNXX is at 3.28% (3.33% APY). That 3.3% is worth about 4.8% APY in a CD for someone in NYC in the 22% tax bracket. And its yield is rising.
Play the game, add a small amount of return and more stress. Settle on a fixed rate for a few months or a couple of years, and relax more. If you're not into the hunt, the latter may be the better path.