Interest Rates on CDs Plummeted in November. How to Invest Now?

John Robinson |

Interest Rates on CDs Plummeted in November.  How to Invest Now?

By John H. Robinson, Financial Planner (December 2, 2023)

In a September 8th FPH Blog post, I explained that there are two schools of thought on how the current inverted yield curve anomaly will revert to its normal shape with shorter fixed-income maturities offering lower interest rates than longer terms.  The prevailing opinion has been that once the Fed believes inflation has bee quashed, it will cut short-term lending rates.  Under this model, longer term rates will stay largely unchanged, and short-term rates will return to the levels they have held for most of the 2000s.  The opposing view (and the one to which I subscribe) is that interest rates and inflation will remain higher than most consumers expect and longer-term rates will continue to rise in reluctant acknowledgment.

READ: Bill Ackman Says Go Short the Long Bond. Here's Why? (Morningstar)

From September through early November, the view I espoused seemed prescient as long term rates started to climb faster than short-term rates. The advice I gave in my blog post was to stagger/ladder CDs (and treasuries) out as far as you can and still get a yield to maturity of 5 percent or more.  By mid-October, I could get brokered CDs paying north of 5% out as far as three years.  On October 23rd, the 10-year treasury yield reached 5% for the first time since 2007. By the beginning of November, I could get 5% at 5 years and was building laddered CD portfolios in earnest for clients with cash to invest. 

READ: Bond Rout Drives 10-Year Treasury  Yield to 5% (WSJ)


In Mid-November Rates Fell Off a Cliff

How quickly things change.  As of today (12/2/2023), the farthest I can extend brokered CD maturities and still get 5% is 18 months.  The 12-month CD, which I could obtain with yields as high as 5.65% three weeks ago now tops off at around 5.25%.  The cause of the sudden change in direction was encouraging inflation data and largely unsubstantiated wishful thinking that the Fed is done raising rates and may be even be inclined to begin cutting rates early in 2024.

READ: Fed Chair Powell Calls Talks of Cutting Rates Premature and Says More Hikes Could Happen (CNBC)


So How Should Investors Respond?

The recent fall in rates was welcome news for borrowers as mortgage rates have declined steadily over the past month.  However, it throws a wrench into my bond/CD laddering strategies.  If I thought the aforementioned prevailing view of a return to historic low interest rates would come to pass, I would continue extending CD ladders to lock in yields in the mid-4% range… but I am still firmly in the camp that believes that the yield curve will cease to be inverted when long term rates return to more historically normal levels – probably in the 5-7% for long term (30-year) treasuries and 5-6% for the 10-year treasury. 

30-year Mortgage Rates will likely normalize in the 6.5%-8% range.  That range may seem ghastly high for home buyers who have only known rates at historic lows, but I am willing to wager that the days of 30-year mortgages in the 2.5%-4% range were a historical anomaly. 6-8% is NOT high by historical standards.

To be clear, I believe the drop in yields over the past few weeks is not the start of a trend.  I believe investors will have an opportunity to get 5% yields in the 3-5 year range again in 2024.  I continue to recommend extending maturities as far as you can and still get 5% yields.  Today, that means 12-18 months

John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software-maker Nest Egg Guru.