If you are a baseball fan you know the term small ball. If not, it means trying to score runs without hitting a home run. I have been tracking money market and brokered CD’s at Schwab. In the last month the steady rise of MM fund rates has ground to a halt while brokered CD rates have moved up,,,even moving out from the shortest terms.
MM SWVXX. FEB 8. 4.41%. Today 4.48%
12 month CD. 4.75%. 5.25%
24 month CD. 4.55%. 5.25%
36 month CD. 4.25%. 5.00%
My question for those with greater insights than I. Does this relative increase in intermediate term and a flattening of the shortest term(Money Market) rates have any meaning going forward?
Comments
”Does this relative increase in intermediate term and a flattening of the shortest term(Money Market) rates have any meaning going forward?”
In short - No.
It might mean market forces are at work. Money has been piling into the shortest end of the curve - money market funds. No need for intermediaries like brokerages and banks to offer higher rates to attract / keep those very short term (possibly fleeting) deposits. But It’s the 1-3 year obligations that the institutions who re-lend the money at higher rates are most in need of. So they’re being forced by market forces to pay a higher rate of interest to secure those funds.
The Federal Reserve, for all the attention it receives, has direct control only at the very short end. As I understand it, the “Fed Funds Rate” (discount rate), which it sets, directly influences the “overnight lending rate” that banks charge one another for short term loans. Beyond that, market forces rule. I was surprised to receive an offer recently from my local credit union for a 13 month CD at a rate well over 5% and with as little as $1,000 on deposit. Were I into cash / short term tie-ups of money (I’m not), I might have taken them up on that. Obviously they’re in need of money to fund their lending requirements a year or more out. Probably having trouble competing with the returns on money market funds.
This is probably of little help as it provides no direction of where rates are heading next. In a sense it’s the “Wild West” in that we’re in uncharted waters. I don’t think even the Fed knows where this will end up.
To quote Larry Summers: ”The Fed understands that it doesn’t understand.”
Investopedia (Definition of Overnight Rate)
As of 3/8/23, 6 months yield 5.34%,12 months yield 5.25% and 2 years yield 5.05%.
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202303
Treasuries are highly liquid that can be sold in open market before reaching maturity.
https://ybbpersonalfinance.proboards.com/thread/158/fomc-statements-6-7-weeks?page=2&scrollTo=918
”Does this relative increase in intermediate term and a flattening of the shortest term (Money Market) rates have any meaning going forward?”
From Larry’s response (and the baseball analogy) I’d guess that he may be looking for something more here than just the technical reasons as to why interest rates at different maturities behave the way they do. Perhaps what he’s seeking are clues on what the rate structure will look like a year or more out. (Knowing that would be beneficial to all investors.)
Your comments re T-Bills and laddering should therefore be of much value to Larry & others here. And there are some other recent threads on best places to park short term funds as well.
For short term cash in taxable accounts, one needs to consider the after tax consequences.
I’d like to chime in that we’re living through a very abnormal period of interest rates. And (not unlike black holes in space) this abnormality tends to distort everything else associated with it.
In a “normal” healthy economy, longer term interest rates would be higher than short term rates. That’s because investors are taking a lot more risk locking up money in a 10, 20 or 30-year bond than they are in buying a 1-year CD. Think about the last time you took out a mortgage. Weren’t the rates for a 30 year mortgage higher than those for a 10 or 15 year one? That’s how it’s supposed to work. However, due to some very unusual circumstances, rates across the curve are highly distorted now with 1-year notes paying a higher rate than a 10-year treasury bond. I think we can be fairly certain that this “upside down” rate structure won’t last indefinitely.
As alluded to, I’m probably unusual in my approach - especially at an advanced age - because I don’t carry much cash. The bond funds I own are intended more to balance out a portfolio than to yield anything. @catch22 studies this a lot and may want to weigh in. Maybe he could give a short snap-shot of the current highly inverted yield curve as it affects bonds at different maturities … But you can be certain this can’t go on forever. And so much depends on things like stock valuations, inflation, recession, Fed policies - and even other global currencies and central banks that it’s a real puzzle. The “experts” I think are as confounded as any of us!
As for why the CD rates have risen further that is based on what has transpired since the shocking January employment report on February 3 which came two days after the last Fed meeting and rate increase, Expectations of even more and longer Fed rate hikes. Hence longer rates have soared since February 3 resulting in higher CD rates. You can bet if tomorrow’s monthly employment report is the reverse, longer rates will fall and those high CD rates will no longer be available. Or if it is again another upside shock in employment even higher CD rates in the future and more talk of a terminal 6%+ Fed fund rates down the road.
Clear as mud right?
UST yields..... 1, 3 and 6 month; as well as 1, 5, 10, and 30 year. The chart starts at October 25, 2022. This was the start reference for the BONDS thread. Call it intuition or whatever, but the pricing/yields caused me to look more closely. I don't know that the chart will help 'see' anything; but it is one I've used for some time, and is real time, if you choose to save the site. KEEP in mind, this is a 'yield', nor NAV/pricing chart.
The Ukrainian war and the inflation pressures everywhere had started to pull the FEDS chain, although they can't do much about many aspects of inflation. And as been noted previous, how far are they going to go with rate increases to 'fix' what they don't like, NOT break the economy and have a 2% inflation rate. Glad I'm not piloting that ship.
@Junkster noted too about the MMKT and CD rates. One may look at MMKT charts and see the steps in yield increases following the Fed Funds rates, at least with a chart view inside Fido for FZDXX. The chart from left to right looks like a side view of stair steps.
I agree with @Junkster about 'clear mud'. There are so many moving parts that the FED and the private sectors are focusing upon, that the best I can do is try to do at this time is be close enough to seeing a meaningful change to cause a change in the portfolio. NOT a fun time, right now; although I'm not a short term trader, I still want to have most of the gains between the high or low of an investment.
IG bonds had their 'protective' place today, yields down/prices up amidst the equity burn.
Perhaps something of consequence from some of the words. In a funk today, so I'm out of thinking gas.