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If bond yields rise, will certificate of deposit rates rise as well? This question from a reader seemed almost plaintive. Not quite like Oliver Twist asking for more, but not too different given that thin oatmeal savers have to be content with these days.
With the Federal Reserve pinning its key federal funds overnight rate near zero, banks see no reason to pay much more, even to depositors willing to lock in their money for a year or two. Based on the $ 13 trillion in short-term deposits and cash equivalents, a 1% rate would provide savers with $ 130 billion in additional income, said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
You can find some banks that actually pay 1% on CDs listed in the Best Savings Deposit Yields table in the Market Week statistic section of Barron’s. (On page M29 here.) That still wouldn’t be enough to keep up with inflation. The consumer price index is up 1.2% in the last 12 months to June, excluding food and energy costs. Over the longer term, this so-called base rate tracks inflation trends better than the headline CPI, which has only risen 0.6% in the past year largely due to falling energy prices (when no one was driving).
To find a return that keeps pace with or exceeds inflation, you have to look beyond familiar CDs or silver funds. And with one exception, none offer Uncle Sam support, as federally insured deposits would.
This exception would be US Inflation Protected Savings Bonds, or I Bonds. Their yield consists of a base rate plus an inflation adjustment made every six months. The current base rate is 0%, plus compensation for inflation, which stands at 1.06% through October. (By comparison, the yield on inflation-protected five-year Treasuries is 1.26%, before they are adjusted for inflation.)
There are, however, a few catch with I bonds. You cannot cash them for a year; if you cash them in before five years, you lose three months of interest. You can only buy $ 10,000 per year electronically ($ 5,000 if you want good paper). They are a good deal only for small savers who can lock in their money for at least a year and preferably longer.
To earn more, you have to take risks, which the Fed is forcing savers to do by making interest rates negative in real terms.
A few companies are taking advantage of this void by offering what looks like money market mutual funds, including daily cash and check-writing privileges. And they pay rates like those previously offered by money market funds, from 1.20% to 2.50%.
But there are key differences. Unlike money market funds, which are diversified portfolios managed by short-term instrument professionals, they are corporate IOUs backed only by the issuer’s promise to pay. These are large state-owned companies, including large utilities, such as Duke Energy (symbol: DUK) and Dominion Energy (D), or units of the automakers General Motors (GM) and Ford Motor (F.)
These tickets have a minimum initial investment of $ 1,000, except for GM, which only requires $ 500 to start. Additionally, Mercedes-Benz offers its own top-of-the-line version for “qualified investors,” the type that can get into hedge funds, with earnings of at least $ 200,000 (or $ 300,000 jointly for a couple). and an investable net worth (excluding principal residence) of more than $ 1 million. For us hoi polloi, Amercoof
(UHAL) The U-Haul unit offers two-year tickets guaranteed by its carts, which his colleague Andrew Bary described last year.
The holy grail of CD investors is a high yield investment that will be paid back on a specific date, unlike most mutual funds which do not have a maturity date. Some closed-end funds attempt to satisfy this desire by aiming to return investors’ cash on a specific date, such as a bond.
That’s not a promise, however, although those listed below expect to do so by 2022. But like so many bonds and stocks, these funds were hammered in during the collapse of the march market. They also invest in riskier areas of the credit market, including high yield bonds, leveraged loans and emerging market debt. In addition, these so-called term trusts often have to reduce their distributions as their wind-up date approaches to ensure that they can repay the net asset value.
Being able to earn a high return without risk is a bit of nostalgia for the past. Now it takes all kinds of contortions just to keep up with inflation, much to the disappointment of readers who write hoping for more.
Write to Randall W. Forsyth at [email protected]