Just checked the posting for next week's rates at my credit union, given the substantial decrease in yields for 5 and 10 year treasuries over the last few weeks. Still unchanged.Don't know if it means anything, but the 5 year rate got as low as 4.75% from October till early January, quickly rising through a couple of steps to 5.5%, where it's been since the end of January or early February. The treasury yields are now back in the post-9/11 range. Maybe the credit union is just slow to react.Anyone been following CD rates elsewhere?
Good Morning, Loki.No, I don't follow CD rates, but this week's Business Week Magazine had a couple paragraphs in their customary "Business Outlook" section, pp.27-8, speculating on Fed policy --which is probably a huge factor in determing what direction CD rates will take-- , arguing that hikes are on hold until at least the Fed's Sept meeting, if then, due to global turmoils, domestic malaise, ambiguous economic reports, etc.If your local credit union is keeping their rates high, relative to the competition, they might be trying to gather assets, or their rate policy committee might not meet very frequently, or ...[fill in a guess here].A favor? The next time you go there, would you ask to speak to whoever sets their rates and then ask the person how they price them? Such an insight into the behind-the-scenes workings of a credit union would be welcomed by all members of this board, I'm sure.TIA, Charlie
Charlie,I don't know how often rate committe meets, but theoretically rates are for one week only (posted Saturday on the Web), and I have seen rate changes as frequently as every couple of weeks, including during January. I'll see if I can find out how to find out how decisions are made.I do know that our credit union beats the rate of the other local for which we are clearly eligible, usually by 25 basis points. I suspect it has to do with having lots of college students, so there is probably more of a need for capital from the profs and alumni members, as well as better returns from credit card loans. What I don't know is whether this should make me nervous, going over insured limits, at least temporarily, trying to take advantage of the better rates.
Loki,As I was perusing the bond offering lists just now, I started wondering why you were messing around with 5-year, 5.5% CD's if you're worried about being over the insured limits at your credit union, when there are trustworthy companies offering a premium to that for their AAA-rated corporate debt. So I ran a screen and came up with names like GE, UPS, Duke, American General, J&J, Bristol Meyers, all offering 6% or better. Then I noticed the maturities: '16 to '32, which is further out than you want to go. I'll buy at the long end. In fact, some of my stuff won't mature until I'm nearly 90. But I'd urge you to look at the lists any way with the thought of putting together a ladder. Another thought: All your gains are ordinary income. You are currently employed, paying ordinary income taxes on that as well. You need to convert some of that income stream to capital gains to defer/minimize your tax bill. If your bogey is a modest 5.5%, find safe equities that will rival that. The net effect will be a premium, becasue you won't be paying the taxman. Just a thought. Charlie
If your bogey is a modest 5.5%, find safe equities that will rival that. The net effect will be a premium, because you won't be paying the taxman. In fact, the more I think about that idea, the more I like it, as a solution to my own tax situation with its overemphasis on ordinary income. ValueLine rates stocks by their safety, timeliness, and appreciation. It seems to me that stocks with impeccable financials (safety = 1 or 2), but very modest and very far-term appreciation (4's and 5's, respectively) ought to be reasonably priced in today's market. Not at their former discounts, as investors flee toward quality, but still reasonable, because they are being priced in comparison to stocks, not bonds.On this afternoon's walk, I'll swing by the UoP libe and see what I can come up with. Caveat: if bought as a bond proxy, the position would have to be actively managed the way a CD doesn't have to be, but I'd bet that the returns would compensate the effort. The keys to success would be several: #1, confirming ValueLine's numbers with your own research; #2, choosing issues that have good technicals, thus allowing the easy installation of protective stops that separate noise from fundamentals; #3, making a timely entry. This will be a fun mini-project. Charlie
What I don't know is whether this should make me nervous, going over insured limits, at least temporarily, trying to take advantage of the better rates. Insurance on credit unions does have a purpose, as credit unions do go bust as frequently as banks. While your credit union may be creditworthy I doubt it would rate better than a BBB rating, barely investment grade. Most Corporate Bonds are safer.
Charlie,What are yo doing up?Taxes are a pain. Chances are overwhelming that putting money into an inded fund now and leaving it for 10 years will beat my CD strategy after taxes. But I'm already too committed to stocks, and I'm trying to protect myself against them doing terribly.Our time frame is complex: in about 10-15 years, depending on where our savings are, health, and other stuff, we'll be out of the workforce, at least way, way down, maybe as early as when my wife hits 60. There is then going to be an 8-10 year period when we want to avoid touching retirement accounts and social security. I want enough safe money to get through that, with plenty of cash left over for later, pretty much leaving the stocks as a guard against inflation for the very long term (when we're well into out eighties and probably dead).So I don't want stocks, though I'm dripping a bit each month into the STAR fund, and I don't think any of the current tax deferral options, notably EE/I-bonds are going to beat CDs in my time frame under current conditions. I've looked at what I can get in corporates and munis coming due within the time frame, and the current premiums make them not worth the risk or worse than CDs after taxes. I'd have to sell long term bonds before they come due, probably at a loss.Of course, I'd like to see some tax changes that make it easier for those saving for retirement to invest in something other than stocks, beyond the increased retirement deductions already on the books. The tax bias in favor of stocks in overwhelming, which is one reason why people put too much money into stocks and caused P/E ratios to go through the roof. I actually like those fixed annuities and may move some money into that if there isn't some upward move in interest rates by next March.
"Insurance on credit unions does have a purpose, as credit unions do go bust as frequently as banks."What's you source on this. The manager at my credit union says no credit union has ever gone bankrupt. Nonetheless, I don't intend on staying over the limit long, but given the higher current rate, I'll take my chances and keep dripping in until I have to make some move in March, anyway.
But I'm already too committed to stocks, Loki, The thought I'm playing with is this: rather than think of bonds as bonds and stocks as stocks, think of them in terms of their underlying structures and their financial purposes. What's a stock? A fractional ownership share of a business whose fortunes you hope to particpate in, whose misfortunes you suffer. But it is also just a piece of paper, an arbitrary token, that people can gamble on, the way they can bet on horses, with the difference being that races end but stocks are auctioned continuously. Your entry and exit, not the end of the race, controls your wins and losses (excepting, of course, bankruptcies.)What's a bond? A loan to a business with a promise to be repaid principal and interest. And bonds, too, are gambled on in a secondary market.But for the average investor, the difference between a bond and a stock has more to do with the volatility and magnitude of returns than anything else. Both are just peices of paper, but one is fairly more secure and offers lower returns. One is fairly insecure and offers (the potential of) higher returns. So, rather than doing the traditonal thing of allocating money among various asset classes, and then later saying "I've got too many stocks" or, "I don't have enough bond exposure", another way to state the allocation problem would be to ask: What are my needs for capital appreciation and how much risk am I willing to take on? The strategy would be to ask, not how stocks and bond differ, but how can they be made equivalent, with risk being the common scale, so that one could be exchanged for the other when the market is pricing one at a premuim to the other --all other things being equal-- which seems to be the situation today of bonds relative to stocks, and has been since the tech crash, as people pay up to avoid preceived risk of equities, forcing bond prices higher and yields lower?If stock ownership can be managed/structured so that its customary risks can be mitigated, then an increased allocation to the asset class becomes possible. That's the problem I'm exploring: ways to manage risk while still achieving return. Yes, I realize there's no free lunches, but often looking at things in unconventional ways highlights qualities and characteristics that would ordinarily get overlooked or dismissed. It's a matter of looking at a tool and seeing an unexpected use for it and then substituting the unconventional for the expected. I'm not yet saying it can be done, but common day examples abound, as smart shoppers know*, and the idea intrigues me and I intend to explore it: Can I use stocks as bond proxies? ... and I'm trying to protect myself against them doing terribly.Protection can take a lot of forms, only of of which is avoidance. For sure, the protection offered is 100%, but what are the opportunity costs incurred? That's another thing I'm trying to explore with this trading gig. How fungible --if that's the right word-- are the various financial instruments? Charlie* I've used the example before, but the idea is sound, or at least makes sense to me. If fresh broccoli (normally ~$1.25/lb) is offered for sale this week at $2.39, I recognize immediately that it's expensive, perhaps due to weather or shipping problems, and I switch to other vegetables for a while, knowing that a lack of buying will force prices down, just as high prices will bring more supply onto the market, also bringing prices down. It's just a matter of waiting out the market. Women's shoes is another classic example of shopping in alternative markets. If you're a female and want a pair of hiking boots, you pay a premium. Go over the the men's dept and start looking at small sizes and you can get a better product, cheaper. The colors and styling scream rugged male --which might even have a reverse appeal, so out of style as to be in style--, but their serviciblity is excellent. Right now, I'll argue, bonds are expensive. Stocks are still way too expensive compared to historical norms --the PE ratio for the SP500 is 25 last I saw-- , but relative to bonds, some stocks offering bond-like returns might be cheaper than bonds. In short, I'm a value investor, looking for value any where I can find it.
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