The elusive 3% return on five year fixed rates remains a challenge for safety conscious individuals. The two benchmarks for safe fixed returns are Certificates of Deposits and five-year Treasury bonds. The highest current five-year CD on Bankrate.com is 1.98%, and the yield on the ten-year Treasury bond is 1.85%. (five-year is 1.4%) Both are a long way from the desired 3% yield for fixed income assets.
The challenge lies in the flattest yield curve in seven years. Yes, that puts us back at the bottom of the financial crisis in 2009. What does that say about the current economic picture? Better yet, how much risk are investors projecting for stocks looking forward? More than the media would have us believe or even Wall Street for that matter. Below is a copy of the yield curve to show you how flat rates are on a thirty-year horizon.
rates short-term. The Fed has been threatening to raise rates for the last two years. To this point they have only moved rates up 0.25% in November 2015. Their recent chants have been to raise rates again soon. Will it be in the June FOMC meeting? Let’s speculate and say they do raise rates 0.25%. What happens to the yield curve? Better yet what happens to interest rates on CD’s or Treasury bonds?
First, go back to the December yield curve which was one month after raising rates 0.25% in November 2015. The five-year treasury note was 1.59% versus 1.4% currently? The ten-year treasury bond was 2.15% versus 1.85 currently? What the heck? How can rates be lower six months after the Federal Reserve increases rates? Therein lies the fallacy of believing what you read versus the reality of what the bond or fixed income market does. The moral of this story is, even if the Fed were to raise rates 0.25% on June 15th it doesn’t mean it will translate to higher fixed income yields for fixed income products.
The better question for those looking for higher yielding fixed income or safety of principal type products is, “If the Fed raises rates 0.25% will it impact the yield short-term that I get on a CD, ten-year treasury bond, money market, fixed annuity, etc?” The answer may well be “NO”, and if the answer is “yes”, how much will the yield on these products really change?
This leads me to one of the most frequently asked questions about buying these types of products… “Should I wait until interest rates move higher?” There is no simple answer to that question because we have no way of knowing when rates will move higher, nor do we know if what we believe will make rates move higher will in fact cause that to happen. See above rate change in November and the yield effect over the next six months. The bottom line is, what we believe to be true, may not be true now.
Let’s return to that question again, “Should I wait until interest rates move higher?” The answer lies within your objective and not what the market will or will not do going forward. If your objective is put money in a safe haven with the best yield possible until you need it for a specific reason, now is the best time to find that product. Make sure you are comfortable with the terms and possible risk associated with the issuer of the product. What interest rates do from that point are a matter of the markets choosing not ours.
Attempting to time interest rates on relatively short-term (0-5 years) time horizons make little to no sense as you cannot predict what will or will not happen with interest rates. As an investor it is important do predefine your objective before looking at specific products for your money. Life is too short to worry about what the Fed will or will not do, and equally important how the investment products will respond to what they do. In the world of mathematics if there are too many unknown variables you cannot solve the problem. In the world of money… the same principles apply.
A quote to live by: “Do not wait: the time will never be ‘just right’. Start where you stand, and work whatever tools you may have at your command and better tools will be found as you go along.” Napolean Hill.