Hard to justify a CD with penalty at 4.6% when a no penalty at 4.4% exists (Sallie Mae/Savebetter). Give yourself the flexibility/liquidity option and give up the 0.2%, seems like the right move.
Well, step 1 is maxing out the i-bond contribution ($10k/pp/py) if you haven't done that, before May when the new rate will certainly be lower. So, do that first for your first $10k.
Edit: ^ The above has an argument against it depending on your view of how Feb-Apr CPI will impact the inflation component of the next i-bond rates. YMMV.
You didn't miss the boat at all btw, I just think this is a good time to buy. There's a lot of laymen inflationary talk and fearmongering going on but sharp traders who actually trade bonds are already looking ahead towards deflation here, and the retail interest-bearing products are going to catch up to that sentiment imo.
Anyway, in order after i-bonds if you don't need the money for 1-2 years:
1. 27-month (a little over 2 years but still) CD posted on SD today that was at 5%
2. 12-month t-bill (~4.65% or so, NOTE: This may be #1 if you live in a high income tax state)
3. CD like the one here for 4.6%
4. No-penalty CD at SallieMae for 4.4%
I actually think the liquidity with the SallieMae CD is worth the 0.2% as I said in my first comment, for the opportunity cost alone. I would rank it ahead of this Ally CD but curated it based on what you said. You never know what could open up and this is a hedge against rates rising higher due to unforeseen wage growth or other inflationary (from a CPE perspective) components that the Fed would use to justify more hikes than anticipated/priced in. Just my 2c, but anyway, buy the ibonds first this quarter.
I think you're thinking about this correctly. A 50bp move from the current rate isn't going to make a material difference in 5y CD yields, which seem to be between 4.3% and 4.5% at the time of writing. Instead, consider what WILL drive them:
1. The dot plot released in subsequent Fed meetings where Fed members provide forward guidance on the terminal rate.
2. The Fed's forecast of core inflation through 2024 and beyond (I believe they're looking at 3.1% long-run, but I might be off on that, don't want to check right now)
3. How 2-5y yields react to the above 2 points
4. How breakevens are pricing cuts moving forward. When, for how long, and how much as well as how aggressively.
With all that in mind, and this is really more of a thought exercise from a trading perspective than for consumers holding these products to maturity, I think the current 5y CD rates will have a positive real return as early as Q3 2024. I think less so of the US 5y mostly because it's trading at 3.5%, but even then I'd probably be long the US 5y rather than short.
I'm not intimately familiar with these banks' business models but a few of these rates, at a surface level, give off an "asleep at the wheel" vibe. The short bond trade is super crowded across funds and crowded trades usually don't go well.
If I were specifically in the market for 5y CDs (I'm not) I'd be buying them now, and I think this will be close to, if not the, secular terminal rate for this cycle.
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I know right? Not sure if its worth the time setting up the account and waiting an entire year and remembering to cash out of the account for that amount.
Thank you for this post. What is the best place to buy a treasury bill and is it also subject to any 10K limit like an iBond if purchased from the treasury?
There is no limit to the amount of treasury bonds (bills, notes, longer dated bonds) you can purchase. You can purchase them through most online brokers (Fidelity, Etrade, IB, Schwab, etc.) or directly through the treasury at TreasuryDirect.com
That's the site for auction. You can use that to buy treasuries as the government is selling them.
There's also the secondary market, which is probably the way to go. Secondary Market - Fidelity Bonds[fidelity.com]
There's a table on this page showing approximate duration and yield for different kinds of bonds. Choose a duration to the right of U.S. Treasury and then you'll see a list of different bonds that you can buy, sorted by yield.
Rates go up/down based on fed interest rate hikes.
Buy CD's
Either a rate bump cd, no penalty cd, or traditional cd.
Park it in high yielding savings accounts
Argument is that it has the most liquidity, and the liquidity is worth the smaller interest rate
Buy VTI
By far the most risky. Mostly by people who are newer to investing or don't understand the goals of CD's or money market accounts
What is the argument against investing in a high yielding money market account like VUSXX? I've seen this mentioned a few times, but can't come up with many reasons not to.
yes, that's a good option too. A lot of people have money at ALLY that hate to keep opening up accounts all over the place. If you're sure you won't have to touch the money before March of 2024, it's a decent rate on a 13 month. The Sallie Mae is a 14 months term to maturity 4.4% with no penalty.
This might sound stupid since I am new to this, but what is a penalty? Penalty on breaking the deposit by withdrawal?
There is no limit to the amount of treasury bonds (bills, notes, longer dated bonds) you can purchase. You can purchase them through most online brokers (Fidelity, Etrade, IB, Schwab, etc.) or directly through the treasury at TreasuryDirect.com
Rates go up/down based on fed interest rate hikes.
Buy CD's
Either a rate bump cd, no penalty cd, or traditional cd.
Park it in high yielding savings accounts
Argument is that it has the most liquidity, and the liquidity is worth the smaller interest rate
Buy VTI
By far the most risky. Mostly by people who are newer to investing or don't understand the goals of CD's or money market accounts
What is the argument against investing in a high yielding money market account like VUSXX? I've seen this mentioned a few times, but can't come up with many reasons not to.
VUSXX isn't a bad option. It's liquid and is currently yielding about 4.23% before the ~0.10% fee. It's very unlikely you'd ever lose any of your money invested in a money market account.
If you simply buy your own treasury bills (rather than letting VUSXX do it for you), then you'll get a better return (e.g. 3 month is yielding ~4.65% and 6 month is yielding ~4.8%). Also, all of the gains will not be subject to state and local tax. Finally, you'll pay no fees or expense ratios (assuming your brokerage is like Fidelity and doesn't charge fees to trade treasuries). Treasuries can decline in value on the secondary market, but if you stick with short terms like 3-6 months and hold them for at least a week or so, then this is very very unlikely.
In short, VUSXX isn't bad, but if you're willing to put in a tiny bit of work and take a tiny tiny bit of risk, then you can get a better return, which may have some tax advantages too.
awesome.. one of the best thread I read in slickdeals in past a few months.. newbie in investments here. after reading this thread, decided to try fidelity and account creation in online was pretty easy. just have couple of questions now. is there any more validation process in fidelity after opening a brokerage account online? also once I buy a Tbill through fidelity , is the selling part just like we sell stocks. I meant, we can cash out the same day when we sell it? is there any caveats involved? appreciate the reply/s.
You can buy and sell securities on the same day with Fidelity. There might be some delay between when you sell a security and when you can move that cash to another account (e.g. your checking account). Technically it takes a day or two for a transaction to "settle."
There's not an extra validation step when you set up a brokerage. I don't think they're going to ask for a copy of your drivers license or anything.
I know right? Not sure if its worth the time setting up the account and waiting an entire year and remembering to cash out of the account for that amount.
30 minutes of your time isn't worth $900?
More power to you.
This is what I believe, correct me if I'm wrong. If you buy a T-Bill from a brokerage firm, to 'withdraw' any money from it before maturity means you must sell the T-Bill. I don't think you can take a partial amount of money out of the T-Bill. The brokerage firm will generally charge a fee for selling (generally not for buying) the T-Bill, and you are subject to the market price of the T-Bill (ie if the interest rate has gone up, you will likely have to sell at a capital loss). This would be the same for a brokered CD. You can sell a brokered CD on the secondary market just like you sell a T-Bill. The biggest benefit of a Treasury IMO is that there is no state sales tax on the interest. And it's backed by the US Government, so it's of the highest safety. Bank CDs are generally FDIC insured up to $250K/person; brokered CDs may or may not be. Oh, and a difference between Treasuries bought from a brokerage firm and directly from the government treasurydirect site is that I don't believe you can sell your T-Bill before maturity on the treasurydirect website -- you'd have to transfer your T-Bill to a brokerage firm and then have the brokerage firm sell it.
Quote
from WindySummer
:
You may be correct in the bold above. I have a few T-Bills. All show minimum profit in my Fidelity account. Two weeks ago I set up to sell one of them to preview the trade. I didn't attempt to sell part of it. I just logged in and attempted to sell half of a T-Bill: Your order can't be placed at this time. Fidelity does not accept orders for secondary offerings outside of normal trading hours. Will see if it allows me to sell part of a T-Bill and report back. I don't think Fidelity charges if I sell before maturity, but they could.
As to the part about buying T-Bills from the treasurydirect.gov website, yes. I wouldn't buy T-Bills from there. It's cumbersome.
It appears Fidelity allows me to sell part of the T-Bill. I have $82,000 in a T-Bill that expires on March 7th. I set it up to sell half of it ($41,000). Looks like I would be selling it for a slight loss.
Purchase History
Acquired Term $ Total Gain/Loss % Total Gain/Loss Current Value Quantity Average Cost Basis Cost Basis Total
2023-01-05 Short +$128.83 +0.16% $81,563.76 82,000 $0.99 -- $81,434.93
Preview:
UNITED STATES TREAS BILLS ZERO CPN 0.00000% 03/07/2023
Bid Price
99.478000
Bid Yield
4.560000
Bid Quantity(min)
36(36)
Third Party Price
99.468
(013005) The limit price that you entered has been adjusted to reflect a mark-down based on the number and type of bonds you have sold.
Preview Order
Account xxxxxxxxxx Action Sell
Quantity 41 CUSIP 792736Y57
Order Type Limit Price Price 99.475
Price w/Mark-down 99.475 Effective Yield 4.586579%
Time in Force Fill or Kill Trade Type Cash
Trade Date 01/23/2023 Settlement Date 01/24/2023
Estimated order value, including $0.00 (0.000%) mark-down and $0.00 accrued interest:
$40,784.75
Please verify your order information before placing order
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Edit: ^ The above has an argument against it depending on your view of how Feb-Apr CPI will impact the inflation component of the next i-bond rates. YMMV.
You didn't miss the boat at all btw, I just think this is a good time to buy. There's a lot of laymen inflationary talk and fearmongering going on but sharp traders who actually trade bonds are already looking ahead towards deflation here, and the retail interest-bearing products are going to catch up to that sentiment imo.
Anyway, in order after i-bonds if you don't need the money for 1-2 years:
1. 27-month (a little over 2 years but still) CD posted on SD today that was at 5%
2. 12-month t-bill (~4.65% or so, NOTE: This may be #1 if you live in a high income tax state)
3. CD like the one here for 4.6%
4. No-penalty CD at SallieMae for 4.4%
I actually think the liquidity with the SallieMae CD is worth the 0.2% as I said in my first comment, for the opportunity cost alone. I would rank it ahead of this Ally CD but curated it based on what you said. You never know what could open up and this is a hedge against rates rising higher due to unforeseen wage growth or other inflationary (from a CPE perspective) components that the Fed would use to justify more hikes than anticipated/priced in. Just my 2c, but anyway, buy the ibonds first this quarter.
1. The dot plot released in subsequent Fed meetings where Fed members provide forward guidance on the terminal rate.
2. The Fed's forecast of core inflation through 2024 and beyond (I believe they're looking at 3.1% long-run, but I might be off on that, don't want to check right now)
3. How 2-5y yields react to the above 2 points
4. How breakevens are pricing cuts moving forward. When, for how long, and how much as well as how aggressively.
With all that in mind, and this is really more of a thought exercise from a trading perspective than for consumers holding these products to maturity, I think the current 5y CD rates will have a positive real return as early as Q3 2024. I think less so of the US 5y mostly because it's trading at 3.5%, but even then I'd probably be long the US 5y rather than short.
I'm not intimately familiar with these banks' business models but a few of these rates, at a surface level, give off an "asleep at the wheel" vibe. The short bond trade is super crowded across funds and crowded trades usually don't go well.
If I were specifically in the market for 5y CDs (I'm not) I'd be buying them now, and I think this will be close to, if not the, secular terminal rate for this cycle.
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LOL
There's also the secondary market, which is probably the way to go.
Secondary Market - Fidelity Bonds [fidelity.com]
There's a table on this page showing approximate duration and yield for different kinds of bonds. Choose a duration to the right of U.S. Treasury and then you'll see a list of different bonds that you can buy, sorted by yield.
Thank you!
What is the argument against investing in a high yielding money market account like VUSXX? I've seen this mentioned a few times, but can't come up with many reasons not to.
This might sound stupid since I am new to this, but what is a penalty? Penalty on breaking the deposit by withdrawal?
It is typically x # of months of interest and you should read the penalty info prior to opening any CD except a no penalty CD
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I can't find this info before opening the account.
https://www.youtube.com/watch?v=mPWiEDl
What is the argument against investing in a high yielding money market account like VUSXX? I've seen this mentioned a few times, but can't come up with many reasons not to.
If you simply buy your own treasury bills (rather than letting VUSXX do it for you), then you'll get a better return (e.g. 3 month is yielding ~4.65% and 6 month is yielding ~4.8%). Also, all of the gains will not be subject to state and local tax. Finally, you'll pay no fees or expense ratios (assuming your brokerage is like Fidelity and doesn't charge fees to trade treasuries). Treasuries can decline in value on the secondary market, but if you stick with short terms like 3-6 months and hold them for at least a week or so, then this is very very unlikely.
In short, VUSXX isn't bad, but if you're willing to put in a tiny bit of work and take a tiny tiny bit of risk, then you can get a better return, which may have some tax advantages too.
There's not an extra validation step when you set up a brokerage. I don't think they're going to ask for a copy of your drivers license or anything.
More power to you.
https://www.wesmoss.com/news/mone...he-market/
I don't think Fidelity charges if I sell before maturity, but they could.
As to the part about buying T-Bills from the treasurydirect.gov website, yes. I wouldn't buy T-Bills from there. It's cumbersome.
Purchase History
Acquired Term $ Total Gain/Loss % Total Gain/Loss Current Value Quantity Average Cost Basis Cost Basis Total
2023-01-05 Short +$128.83 +0.16% $81,563.76 82,000 $0.99 -- $81,434.93
Preview:
UNITED STATES TREAS BILLS ZERO CPN 0.00000% 03/07/2023
Bid Price
99.478000
Bid Yield
4.560000
Bid Quantity(min)
36(36)
Third Party Price
99.468
(013005) The limit price that you entered has been adjusted to reflect a mark-down based on the number and type of bonds you have sold.
Preview Order
Account xxxxxxxxxx Action Sell
Quantity 41 CUSIP 792736Y57
Order Type Limit Price Price 99.475
Price w/Mark-down 99.475 Effective Yield 4.586579%
Time in Force Fill or Kill Trade Type Cash
Trade Date 01/23/2023 Settlement Date 01/24/2023
Estimated order value, including $0.00 (0.000%) mark-down and $0.00 accrued interest:
$40,784.75
Please verify your order information before placing order
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