Time to extend CD maturities.

Brookswood

Brookswood

Senior Member
Unless inflation really gets fired up we may be heading into the time when CD rates start to flatten out. It‘s been tempting to keep CD maturity under about a year so as to catch the ever increasing interest rates. But, I am thinking it might be time to go longer and lock on some rates in the mid 4% area. As my short term CDs mature, I am seriously thinking of stocking up on Four and Five year non-callable CDs. All FDIC insured, of course.

Non callable is important. If the interest rates go down the banks will pull the rug out from under you in a New York minute if your CD is callable.
 

Brookswood said:
Just bagged a non callable 4.6% five year CD.
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I suppose it all depends of a persons age & the income free to be locked in for the extended time frame. Income part isn't a problem it's at my age short term works best. It does seem like a reasonable strategy for younger people.
 

Knight said:
I suppose it all depends of a persons age & the income free to be locked in for the extended time frame. Income part isn't a problem it's at my age short term works best. It does seem like a reasonable strategy for younger people.
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That's a good point. A 90 year old in poor health probably doesn't need to buy a 10 year bond that pays out a maturity. But, a 60 year old in good health, with a family history of long lived relatives, might be interested in that 10 year bond if the interest rate is good.
 
I recently picked up a 3 year non callable CD yielding 4.5%. I see no reason to take the call risk and have the rug pulled out under my income plans by some tight fisted banker. If they offered me 6% on the callable CD it might be worth the risk. But all they offered was 5.4%, not even 1% more interest. Not good enough.
 
My target has always been at least 5.5% to go long because you can't predict future inflation. There are several preferred stocks out there paying over 6% with the biggest banks......while there is risk of principle loss if the bank fails in the biggest banks I feel that risk is relatively modest.....
 
I just picked up a 3 year CD that is call-protected. Its yield is 4.8%. Very Nice. It’s a brokered CD so you have to go through Fidelity, Schwab, Vanguard to find similar deals.
 
About a month and a half ago we got 5.3% on 13 month CD rates at Amergy Bank, where we bank at normally.
Now its up to probably more after this last rate hike.
 
I just found a 3 year non-callable CD yielding 4.8%. I’ll take that. Short enough that I won’t get clobbered if rates rise much more. Long enough to give me a nice cushion if rates fall. And, it can be taken away from me early by the bankers.
 
Brookswood said:
I recently picked up a 3 year non callable CD yielding 4.5%. I see no reason to take the call risk and have the rug pulled out under my income plans by some tight fisted banker. If they offered me 6% on the callable CD it might be worth the risk. But all they offered was 5.4%, not even 1% more interest. Not good enough.
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I have dealt with CD's and this is the first time I have heard of a "callable CD." Is there another word for it? I'm scratching my head on this one.
 
palides2021 said:
I have dealt with CD's and this is the first time I have heard of a "callable CD." Is there another word for it? I'm scratching my head on this one.
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From what I understand it means the issuing institution can call the CD in before the maturity date. If the CD was issued at a high rate and then all the rates fall the bank can call it in so they don't pay the high interest rate thru maturity. Takes the qaruntee out of it in my opinion, but I'm not an expert.

Someone correct me if I'm wrong.
 
palides2021 said:
I have dealt with CD's and this is the first time I have heard of a "callable CD." Is there another word for it? I'm scratching my head on this one.
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Callable CDs allow the bank to pay you off early by giving you your principle and any interest earned to date. For, example you buy a CD that yields 5% for 5 years. It’s callable every 6 months starting in two years. If interest rates go down to 3%, after two years the bank calls your CD and pays you off. You get your investment plus interest earned for the first two years. But…..Then you get to reinvest the money at the lower 3% interest rate. No more earning 5%. Unlucky you. Lucky bank.

You take most of the risk if interest rates go down. Not good for most of us.

I like CDs that can’t be called. Then if interest rates go down the bank still has to pay me the 5% for 5 years that I signed up for. Lucky me. Unlucky bank.
 
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The Fed may be done raising rates at least for a while. So, waiting on the sidelines for higher rates may no longer be a good option. Over the night the 10 Year T-Bill hit 5%, though it dropped below that by morning. TIPS reached their highest fixed rate in many years at 2.44% plus inflation.

I just renewed a 5 year CD for 4.85% call protected, and I am quite happy about that.
 
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I have 7 CD's between 5.25% and 5.50%, in a ladder structure 3 month maturity up to 18 months, paying interest monthly.
Plus a 7 year fixed annuity paying 5.50%, interest payable monthly.
Payments rolling in every month.
Here is the snapshot from my brokerage firm.

CDs.jpg
What this tells me there is still some uncertainty in the markets. The higher rates are in the shorter timeframes. Once the shift from 3,6,9,1yr,18mo rates to the 2,3,4,5,10 year increases, that is telling me the equities markets are coming back and time to take those near term CD's and move them to stocks, paying dividends.
 
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When looking for income flow there are two ways to generate that is somewhat predictable and (somewhat) safe.

When the equities markets are good, I look at the Dividend Aristocrats that are paying the highest dividends. These are usually paid quarterly.
A dividend aristocrat is a company in the S&P 500 index that not only consistently pays a dividend to shareholders but annually increases the size of its payout. A company will be considered a dividend aristocrat if it raises its dividends consistently for at least the past 25 years.
I look for dividends in the 4-6% range. The down side is although you get dividends, the share price can go down, so capital preservation(the cost of the shares) is at risk.

When equities are not in good shape, I turn to CD's for the guaranteed interest rates, with interest payable monthly. With monthly interest payments, typically there is a drop in interest rate around 0.45 %.
Your capital is protected 100%, even if the bank goes bankrupt, through FDIC.

Many would say you shouldn't time the market on when to get in and when to get out. I agree. But with CD's (and fixed annuities) you aren't trying to time the market waves, but something more subtle, like the tides. If there is a market correction, you have time to move funds to take advantage of the (somewhat) high, and (somewhat) lows
 
Sippican said:
When equities are not in good shape, I turn to CD's for the guaranteed interest rates, with interest payable monthly. With monthly interest payments, typically there is a drop in interest rate around 0.45 %.
Your capital is protected 100%, even if the bank goes bankrupt, through FDIC.
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Why the interest payable monthly? You can take quarterly or bi-annual payments, put them into a MM fund earning about 5% and just draw out what you need. It requires a bit of discipline, but your posts indicate you are the kind of person who has that virtue.
 
Brookswood said:
Why the interest payable monthly? You can take quarterly or bi-annual payments, put them into a MM fund earning about 5% and just draw out what you need. It requires a bit of discipline, but your posts indicate you are the kind of person who has that virtue.
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Because Money Markets can change daily.
I take the interest monthly and put it in the MM at 5.25%
After a couple of months, I can buy another CD. Using the CD monthly proceeds to start another CD.

There is no advantage of taking quarterly or bi-annual, vs monthly.
The 4 months of interest ( or 6 months of interest) doesn't add to the CD value for upcoming interest. Its money sitting, not being used to generate more income.
 
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To clarify, CD do not compound interest. Its a flat interest paid on the initial buy. By letting the interest stay in the CD, there is no benefit.
On a 100K CD at 5.5% for 1 year, payable at maturity, would leave $5,500 not earning interest.
 
Sippican said:
To clarify, CD do not compound interest. Its a flat interest paid on the initial buy. By letting the interest stay in the CD, there is no benefit.
On a 100K CD at 5.5% for 1 year, payable at maturity, would leave $5,500 not earning interest.
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Thanks for clarifying.
 


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