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I DID IT AGAIN. I correctly identified a trend but jumped too soon.
When interest rates plummeted as the Federal Reserve reacted to COVID-19, I had a ladder of certificates of deposit. Some of these CDs are only now reaching maturity. Each step of the ladder yielded 2% to 3%. This looked good in comparison to the low rates available through most of the COVID period.
As the short-term CDs in the ladder matured, I deposited most of the proceeds in a high-yield savings account. Its interest rate had dropped as low as 0.5%, but I accepted that low return because I didn’t want to lock in low CD rates for the long run.
Not long ago, I wrote about using this money to partially rebuild my CD ladder. Rates were inching up and I thought a yield of just over 1% was worth locking in with a 13-month CD. After all, this was a better rate than what had been available during the past few years.
My first indication that I could do better came in a comment from a HumbleDollar reader, who asked why I would buy a CD when I could build a ladder of one- to three-year Treasurys yielding far more. An added bonus: Interest on Treasurys isn’t subject to state or local income taxes, raising their effective return.
The short answer is, I’d never before considered Treasurys as an investment option. I’d only just opened my first TreasuryDirect account a few months earlier to take advantage of Series I savings bonds, then paying an initial annualized rate of 9.62%.
The other factor: I didn’t appreciate just how fast interest rates would rise this year—or that the rates paid on Treasurys would rise considerably faster than bank CD rates. Banks are still not hungry for CD money, apparently.
After my false start with low-rate CDs, I started to rebuild my ladder for a second time. A ladder usually has two advantages: You get higher rates for investing in longer maturities and you get cash flow from the shorter-term investments as they mature.
To rebuild my ladder, I learned how to submit a purchase for a future auction on TreasuryDirect. The website is a little clunky, but—after a couple of transactions—I began to learn my way around. There are no transaction fees.
I’ve made six purchases at auction so far, and two more are pending. I’ve already had one 13-week Treasury bill mature. When I bought it, the payment for the T-bill was electronically debited from my high-yield savings account after the auction. When the T-bill subsequently matured, the proceeds were electronically deposited back into the same account. There was no need for human interaction.
As interest rates rose, I was still stuck with two recently purchased CDs yielding around 1%. An online calculator showed me that, even after subtracting the early withdrawal penalty, cashing in the CDs made sense. I bit the bullet and redeemed the CDs to buy a new CD yielding 3.5%.
At the moment, short-term CDs have better yields than longer ones. Before COVID, I was buying four-year CDs for each step on my ladder. Now, my ladder is primarily made up of investments maturing in less than a year, and some as short as three months. I did reach out to bid for one two-year Treasury note. That’ll probably turn out to be another mistake. Live and learn.
At some point, long-term rates will once again exceed short-term rates by a meaningful amount. When that happens, I’ll lengthen the maturities of my Treasurys and CDs as my current T-bills mature.
I’ve been buying T bonds on the secondary market with cash in my brokerage account. You only pay a few basis points to do this, and you can choose any duration from 3 months to 30 years, with the same tax advantages as T bills, but without dealing with Treasury Direct.
When my 3 month-ers mature in Feburary, I’ll look at rolling them into longer T bonds at hopefully a higher rate after the Fed meeting in December.
One of the ideas I posit in my new book, How to Craft a Resilient Retirement Income Plan, is that you can now access period certain income annuities with traditional commissions stripped out via a Registered Investment Adviser (RIA). This way, you take advantage of the expertise of an insurer to do the asset/liability matching to generate cashflow. Once you get a quote, you can go on Bankrate.com, plug in the numbers, and see what the internal rate of return is.
Thanks for the article.
I also recently started buying I bonds at Treasury Direct in February 2021 after reading comments Dr. John Lim on Humble Dollar. I also currently bought a 3 year T Note in my Vanguard traditional IRA. I am working on creating a ladder of no risk money in my traditional IRAs to fund my future RMD’s and now have expected 2023, 2024, 2025 and 2026 RMDs covered by CDs or T notes and plan to cover five years of RMD’s with safe savings going forward as I consolidate retirement accounts. Laddering seems to be a great option to me to allow worry free RMDs.
Having my future IRA RMD’s covered by laddered investments without market risk has made it easier for me the stay invested heavier in stock index funds.
I plan to evaluate my tax situation annually and decide on Roth conversions for amounts in excess of RMD’s while both my wife and I are alive to make use of the MFJ tax rates while we are both around. I plan to have the majority if not all of my IRA money in a Roth by age 85 with a goal of keeping our lifetime tax obligations at the minimum. I would rather pay a lower tax rate now rather than having a higher rate of taxes due after one or both of us have died and the Roth assets go to our kids.
For those who can get past the dirty “A” word, a MYGA can also be a reasonable alternative that provides higher-than-CD yields, and is considered *almost* as safe as a bank-insured CD. The drawbacks are that generally higher (usually something like $25K+) deposit amounts are required, and term minimums are usually around 3 years or so. But this can also be an advantage, depending on what you are looking to do.
I agree that treasuries are superior to CDs in almost every instance. For those that do not want to deal with the clunkiness of TreasuryDirect, you can usually buy them through your broker as well. Fidelity, for one, makes it very easy to buy them and even has an “autoroll” feature which will again buy when your current one expires, so as to make laddering 3-month, 6-month, 1-year, etc. very easy to sustain once you set it up. It is likely that other brokers offer the same or similar services.
One idea for liquidity are prime money funds. Yields approaching 4%. Monthly dividends, daily accrual. Next day settlement.
Nice, very timely article. Thanks Howard.
The pace and magnitude of the rate increases during the last 6 months has inevitably resulted in buyers remorse. In May a 2 yr Treasury at 2.5% looked very strong. A 2yr CD at 2.9%, even better. Today, a 2yr CD (call protected) is available at 4.85%. What’s worked best for me has been to keep some powder dry and take what the (Fixed income) market gives you. In some cases a CD may be the best offering, in others a CD. The current money market yield at Fidelity, 3.78% (FZDXX), is not a bad yield if you’re trying to figure out next rung on the ladder.