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Playing small ball with the Non-Equity side of my portfolio

edited March 2023 in Fund Discussions
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

  • edited March 2023
    I disavow any claim of “greater insight.” But as no one else has taken this up I’ll venture an opinion …

    ”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)
  • edited March 2023
    Thanks for your thoughts. As I move toward mid retirement I find my need for income is less than anticipated but my loss aversion is greater than before. Thus my interest in lower risk investments.
  • For sure! No intent to influence anyone’s investment decisions. Situations vary greatly.
  • Not trying to change the topic. Treasury bill and notes are also competitive to broker CDs. They are good vehicles to build ladders.

    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.
  • BTW, fed fund rate is the overnight rate for banks to borrow from each other. Discount rate is the rate at which troubled banks may borrow from the Fed Discount Window (looks like it was shut for crypto-friendly Silvergate/SI that is shutting down and liquidating - probably a buyer couldn't be found either). Reserve rate is that paid by the Fed to banks just to park their excess reserves at the Fed.
    https://ybbpersonalfinance.proboards.com/thread/158/fomc-statements-6-7-weeks?page=2&scrollTo=918
  • edited March 2023
    @Sven - Thanks for chiming in. Valuable information. I tried to limit my remarks to the actual question as Larry worded it:

    ”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.
  • edited March 2023
    @hank, really appreciate to pose Larry's question. Honestly I don't know.

    For short term cash in taxable accounts, one needs to consider the after tax consequences.
  • Guys,,,,, thanks for all your replies… Perhaps no explanation exists, perhaps nobody knows nothin or perhaps it’s just market forces in action. But in about the last thirty days MM fund is flat and 60 month CD’s have increased by 1.0%. 48 month CD’s have also increased by the same 1%. The shorter the holding period the less the increase. Down to virtually no change in the yield of SWVXX which has the shortest term. Is this not the opposite of the infamous inverted yield curve? I know that CD rates are set by bankers, not the central bank but I find what’s going on curious. As far as predictive value I don’t hold much faith in guessing. A month ago lots of experts were talking that rate increases would soon be in the past and folks were pouring back into bond funds. Nobody knows nothin.
  • @ Sven… “ one needs to consider the after tax consequences.” Damn right. Tax year 23 will be vastly more expensive than tax year 22 if one holds lots of taxable interest bearing stuff. Playing around with TAX CASTER is an eye opener.
  • edited March 2023
    Putting @Larry aside …:)

    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!
  • larryB said:

    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?

    The flattening in money market funds is normal because they are limited by the Fed funds rate. There was a 25 basis point increase in Fed fund on February 1. At that time your fund was yielding 4.27. So you would expect a rise close to 25 basis points after the Fed funds increase and that is pretty much what we have had - a 21 basis point rise to 4.48. It could still rise to around 4.49 to 4.50 before the next Fed funds rate increase in two weeks. Then, like before there will be a rapid one week to 10 day increase of close to 25 points or 50 points in your money market depending on which of those two rates increases the Fed decides upon.

    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?
  • @hank @Junkster et al
    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.
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