Wednesday, February 20, 2013

CD Rates in 2013 Offer Little Return

So here we are another year gone by and CD rates in 2013 continue to offer little in return in terms of yield. Although the outlook for the economy is quite a bit better this year than last year we still have a great uphill climb to make before savers begin to see recovery in their fixed income investments. Here are some thoughts to guide you through the next few months.

FED POMO / QE3 Continues to Keep Yields Low

Face it: the Federal Reserve is the ultimate competitor for interest bearing assets these days, and with unconstrained ability to buy assets (effectively) they can and will keep yields low indefinitely until the economic recovery is complete. The end of Operation Twist (neutralized debt purchases) also meant the beginning of QE3 - which includes not only $40 billion / month of treasury buying, but also another $40 Billion (+/-) of MBS (mortgage backed securities) buying - effectively absorbing the safest assets for yield in the market. So long as the FED POMO operations continue to buy fixed income securities CD rates will remain exactly as they are - effectively yielding nothing.

Any Signs of Hope for Increased CD Rates in 2013?

Thus far we have seen open-ended buying in the fixed yield market from the FED. Even though the US Treasury Department continues its need to borrow at unprecedented levels the continued presence of the Federal Reserve in the market bullies out any and all other reasonable offers for government assets. Some encouraging news RE: CD rates is the wording of some of the recent FED minutes indicating reduced appetite for monetary stimulus amongst the Fed Governors. Having said that until the US budget talks are settled and uncertainty is reduced regarding the future economic expectations I think we will see little movement away from monetary stimulus. If the Fed does threaten to end asset purchases / QE3 - it might be time to invest in put options because it is entirely likely that the recent stock market run-up is fueled entirely by Quantitative Easing.

What to Look for in the Coming Weeks

As we look ahead to the future it is most important to continue to monitor the Fed minutes for any sign of reduced monetary stimulus. As mentioned above we won't likely see any change in policy from the Fed until Congress and the President come to grips with the coming sequestor on the Federal Budget. If budget talks between the President and Congress show some signs of progress then maybe, just maybe there will be some light at the end of the tunnel for savers like you and me. ...I ain't holdin' my breath.

Tuesday, September 27, 2011

Savings Yields from High Interest Accounts Continue to Dwindle

Many of us, myself included, expected savings yields from high interest accounts to be rising by now. Unfortunately despite the "best" efforts from global governments the world economy is now growing fast enough to produce better interest rates. The result is that savings yields from high interest accounts continue to dwindle.

Intermediate Term Rate Forecast Looks Grim

The Federal Reserve committed to holding interest rates effectively at zero for the next two years. Given most short-term interest bearing accounts rely on yields based off of government backed security rates that means we can expect sub-par yields at least through 2013. While some have argued that inflation threats continue to mount in the face of easy-money central bank policies - the overwhelming evidence continues to point to the contrary. As it stands now there is an overwhelming resistance to taking on more private debt, and the only people seemingly willing to do so are commodities speculators. It is current commodity speculation that is creating the illusion of inflation in absence of real demand for goods.

CDs Offer Some Yield But Are Inflexible

One year CDs offer slightly more than what you would get in terms of savings yields from high interest accounts however the rate isn't significantly above 1%. Even returns on 5 year CDs are only offering a max of +/- 2.25%. That hardly seems worth the additional risk of holding money in time deposits that far out. One might be better served seeking better rates elsewhere I would think.

Alternative Ways to Add Higher Returns

One of the goals of the Federal Reserve's low rate policy was to force investors further out the yield curve in terms of risk. Problem is nobody with money to lend wants to be that far out holding that low yielding debt. The 10 year treasury (as of just a few days ago) was only yielding 2%! That's no way to earn income in retirement if you ask me.

Best I can tell the way to add yield in this horrible fixed rate economy is by finding quality preferred stocks or other dividend yielding securities such as telecom or utilities. The highest rate of return short term investments are binary options however I don't imagine too many retirees want that much risk.

Factors That Could Make a Difference

There are two centers of trouble for the global economy: the US housing market, and the Euro-zone periphery nations' deficit problems. If either one of these problems is effective addressed then economic improvement will slowly start to pick up. The US economic problem could be addressed by a significant increase in productive short term spending according to some theories, while others insist on further government debt reduction efforts. A combination of solutions might be best.

More on the state of the economy:
Should You Prepare for Inflation or Deflation?
Making Money During Recession Economies

Sunday, December 6, 2009

Should I Invest in an IRA or CD -- Which Is Better?

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"Which is better?" is the question, IRA vs CD for your retirement nest egg. Many people are wondering what on earth to do with their money these days because the financial world has gotten so volatile and out of control. Many have watched their investments tank, either due to the economy, corporate malfeasance or financial fraud. Simple people the world over are wondering what forces have caused such a dramatic swing in US stock markets without any fundamental changes underlying the move. How can this be?

Causes for the Rollercoaster Stock Market
A great deal of money is concentrated in the hands of too few decision makers - enabling hedge funds and institutions to influence the market with the sheer mass of their capital. The argument that the companies that make up the Dow Jones index were worth 6,500 in March are suddenly worth 10,000 by November just doesn't hold water. What fundamentally changed in those 6 +/- months? The answer of course, is nothing fundamentally changed. At this point it seems like anything can happen because of the volume of money that can be brought to bear and withdrawn at the whim of a fickle finger.

Imbalances and Institutional Instability Cause Mini Credit Crisis
Large institutions felt the crushing weight of their own largesse and were forced to raise large amounts of cash quickly. Margin calls and redemptions put a number of institutions and hedge funds in dire straights - forcing them to sell into an already depressed market. Though the pace of mayhem has slowed - primarily due to the massive liquidity provided by the Fed, banks around the country continue to fail. 124 banks have failed this year at last look - each time wiping out the equity of investors. The result is weak institutional players are being squeezed out and bankrupted one at a time. Each time another stone drops another round of volatility as positions are folded up and liquidated.

How Should You Ride the Rollercoaster
Times like these remind us in the IRA vs CD debate the value of having both a risky asset IRA combined with a CD. A CD makes a nice addition to a retirement plan - and likewise a little risk mixes nicely with a conservative CD. So you when you consider "IRA vs CD" remember it doesn't have to be either or - in fact it should be both. An equities only portfolio is much too risky in the upheaval we see in today's markets but CD rates are too low to stand on their own.

Examine a chart of a high rate CD combined with an IRA equity account.

Sponsored link:
Picking up a high rate CD is a smart money move in volatile economic times See the high rate CDs at EverBank

Monday, November 9, 2009

High Rate CD Beat the SP 500 - The Short Term Investing That Ruined Retirement Funds

The notion that an average high rate CD with 6 month maturity would beat the performance of the S&P 500 is outrageous, and yet it has happened. When future investment management students look back at this period in financial history, they will stare in awe at how badly the stocks of the S&P 500 companies have performed.

Nothing I Was Taught Prepared Me for This Kind of Market
I was a financial student in the early 90s, and nothing I was ever taught would have led me to believe that the stock market's performance would be dominated by the performance of boring plain vanilla high rate CD. The standard quoted risk premium of the S&P 500 was supposed to be somewhere around 8.4% over and above the risk free rate.

Be It Bad Economic Times, Money Mismanagement, or Fraud... Equities Markets Performed Terribly
Whatever reason we choose to assign for the abominable performance of equities markets in the time period of approximately 1995 through year end 2008, the results are undeniable. Investors who put their money in the stock market anytime after somewhere mid-year in 1995 would have been outperformed by a high rate CD or even simply stuffing it in a mattress.

What to Do Going Forward
What most stands out about the investing results from the last dozen or so years is that long term investing must not be done with blinders on. Simply handing money over to an investment advisor or mutual fund and expecting historic returns of 8-12% is a recipe for disaster. Prudence dictates alertness to market movements and increased short term investing.

Be sure to check out historical high rate CD performance.

Saturday, November 7, 2009

Choose Carefully When Selecting High Rate CD Today

Get a Great CD from Everbank online

Selecting a high rate CD for your excess cash if your bank is weak can be risky even when FDIC insured. Everywhere you look you see a high return CD product your local and national banks are pushing. Many of these high rate CDs are being offered by TARP recipient banks. What does that matter to you?

CDs Offer Slightly Higher Return, But What Is the Catch?
Imagine a CD at a local bank. Money placed in this type of account restricts the client's ability to use the funds. That money represents (in financial terms) a loan you are making to the bank for a specified period of time for which you will be paid interest. Given the rates on these loans are much cheaper than regular borrowings would be, banks obviously would very much like to have as much of clients' money on long term deposit as possible rather than have to find other financing.

You Aren't the Only Person Benefitting from High Rate CDs
It stands to reason then that some banks offer higher return CDs above market competitive rates. Rather than just plonking money down, clients should be asking, "Why are they offering more than the other banks?" Sometimes a high return CD offer is a desperate effort by a stressed bank to attract much needed short term liquidity (a real warning sign!). If your bank is financially stressed and in the news, or has received TARP money... is the risk of losing access to your funds for a period of time really worth the extra quarter percent? It probably isn't the best idea to put your hard earned money in a high rate CD at a TARP bank.

Find out more about high rate CD offers and how they stack up to stock returns. You'll be shocked!

Get a Great CD from Everbank online

Other High Interest Account Articles:
Best Savings Account for Kids - Online, High Rate, and Linked to Local
High Rate CD Beats S&P 500 for a Decade - Don't Laugh It's True
Savings Accounts for Children -- Steps and Tips to Opening an Account

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