I’ve noticed my money market and my high yield savings accounts yields have both fallen .3% already since the rate cuts. Expecting more of course. And I think the markets are as well. Looking at rates on Vanguard for CD’s and Treasuries, in all cases short-terms are yielding noticeably higher than longer term. (And in all those cases the money market still yields higher).
The one outlier is a 5-year CD at 4.35%, but it is callable. I have zero faith that CD won’t get called. Even the 2 year at 4.0% might get called but I’m willing to risk that.
What are people thinking money markets will fall to? I’m currently at 5.04% but no doubt by year’s end it will be in the high 4s. After that?
I will keep at least 2 year’s expenses in the money market. After that I’m entertaining 2, 3 and 4 year CDs or Treasuries. My thoughts are anything over 4.0% is worth buying, but I’m not finding much at those yields at all.
As everyone knows, the Fed is clueless about the real economy and did its 50 bps rate-cut as a political favor to the entrenched regime. But since last Oct, “the market” has walked down short-term rates (on the 13 wk bill, for example) by around 66 bps, meaning, as many are saying, that “the Fed is behind the curve”.
The broad expectation is that rates will head lower, and in the short-term, that’s likely to happen. But lower rates also mean a weaker $US dollar and persistent and higher inflation, never mind the pressure on the $US dollar from much of the world dedollarizing and increasingly settling trades in their local currencies.
The situation is this. After taxes and inflation, CDs, T-bills, money market funds, etc. don’t offer a real rate of return. So if purchasing power is to be preserved, means other than those vehicles need to be used.
Don’t buy that for a sec. And let’s not forget TFG berated the Fed for trying to raise rates during his term.
Having said that, return of capital is more important for these funds than return on investment. (Otherwise they would not have been in a MM in the first place). Thoughts on other vehicles to get a real rate of return with very low risk to capital?
Rates began dropping long before this first rate cut by the fed. For example, the 26-week T-bill that I bought last year on 9/28/23 resulted in a yield of 5.58% at auction. And the 26-week T-bill that I bought this week resulted in a yield of 4.425% at auction. Rates, at least at the 26 week term, are down over 1% already!
(The same applies to 52-week T-bills, the 9/5/24 maturity one was 5.417%, and the 9/4/25 maturity one was 4.345%, also down more than 1%.)
I was very lucky, last week I snapped up a few short-term CDs at 5% yield, but that is the last of them. Even the 4-week auction last week resulted in 4.783%, well below 5% already.
It’s nice that the Fool makes this service available to everyone with a keyboard, even the fantastically clueless, because a mix of opinions is often healthy.
@bjurasz I follow your thinking. I have moved into AA rated and above munis which I find in small lots on Fidelity. I am careful to buy non-callable when extending my bond ladder if the coupon rate on the bond is high. Bonds with low coupons that originated in the low-yield years are less likely to be called.
Fed chair Powell has said that the FOMC intends to maintain a neutral fed funds rate. But I don’t have confidence that the FOMC would resist pressure to cave like Bernanke if a recession – let alone a financial crisis – should occur.
One year ago I would have never been so into bonds.
Vanguard has some “Municipal (AAA)” bonds, with 1-year near 4% and 2-year at 3.58%. These are federal income tax exempt correct? I also have a small amount in VTEB but I’m leary of buying much of any bond fund, as you are.
I got overwhelmed by the selection of bonds so I asked perplexity.ai “how often do AAA rated municipal bonds default” and got this reply:
Based on the information provided in the search results, AAA-rated municipal bonds have an extremely low default rate:
According to Moody’s data covering the period from 1970 to 2022, the cumulative default rate for AAA-rated municipal bonds over a 20-year time horizon is 0.00%.
This 0.00% default rate for AAA-rated municipal bonds compares to a 0.73% cumulative default rate for AAA-rated global corporate bonds over the same 20-year time horizon.
The study emphasizes that municipal defaults are generally very rare, especially compared to corporate bonds.
The average five-year cumulative default rate for the entire municipal sector has been stable or has fallen over the past five years.
Municipal credits continue to remain highly rated overall, with the median rating of municipal issuers being Aa3, compared to Baa3 for global corporates.
In summary, AAA-rated municipal bonds essentially never default based on historical data covering over 50 years. Their 0.00% default rate over a 20-year period demonstrates their extremely high level of credit quality and reliability as investments.
That seems amazing to me. Is that even remotely accurate?
If we go to a tariffs and low corporate tax rate environment than the FED must print. Yes we get massive inflation. We would have little choice. This would be getting back to supply side economics at the wrong time. We would have a steep recession.
If we go to a supportive fiscal policy for a factory buildout then we get economies of scale and light inflation. We export a global deflationary effect. We grow the economy quickly.
We rely on fiscal policy at this point in the cycle either way.
The pre covid numbers were also anomalous. It was a holdover from the 2008 debacle, and arguably could have been raised anytime after 2014 or so. I suspect the rate will not be lowered so low this time so as to give the Fed some “fuel” if the country would slip into recession. I’m not sure what they could have done if it had happened in the era of 1% or 2% interest rates (except go negative, which is fraught.)
I’m expecting that the rates will stabilize somewhere between 3 and 3.5%, but like any of them, it’s just a guess.
…and it is worthwhile to remember the increasing number of municipalities and states (Illinois!) that have issued bonds that are currently “problematic”:
When some of these (i think inevitably) go busto, the overall governmental bond market might take a bad hit….
Or the USA government and some states would need to mount a major market disrupting bail out. I hope no time soon.
Do bonds suffer rating declines, before they default? That is, is a formerly AAA rated bond downgraded to AA, then A, then AB, or whatever the progression is, before it defaults? If so, then, technically, AAA bonds never default, because they aren’t AAA rated anymore, when they do default.
This is of interest to me to estimate the possible yield boost for BLE from the improved yield spread when the yield curve uninverts. I would assume BLE would invest about 30% of assets into leveraged investments and the yield gain should be the difference between 2 yr and 10 yr rates (at least).
@bjurasz each bond is different. The bonds that I buy are not income tax exempt. WA State doesn’t have an income tax so this isn’t a disadvantage to me.
Fidelity’s research section has the ability to choose many selection criteria. I choose:
Dates (in my case, 1/2030 to 12/2038 since I am extending my bond ladder.
Moody’s and S&P ratings (in my case, AA to AAA).
Yield over 5%.
Then I reject bonds with call dates that are less than 5 years.
Sometimes I start with over 200,000 potential bonds and end up with less than 5 candidates. They are often “confetti” which are small lots that don’t interest the big traders.
I would not buy a bond fund since these wouldn’t buy the small high-yielding lots.
Yep. You also have to look on a regular basis because those small lots show up periodically and randomly. The same applies to CDs, sometimes a higher yielding one pops up briefly, but disappears rapidly. A few weeks ago, only $1000 was available for a CD, but I snapped it up anyway. Last week I got some short-term 5% CDs from 3 different banks. Those were the last of the 5%+ yields, now the best is 4.7% (all very short-term).
