Hi Friends, Here is some helpful information on the new concerning investors moving to U.S. Certificates of Deposit recently. All the Best ~ The Madison Poole Crew
Presented by Madison Poole, March 2023
As the US Federal Reserve began raising interest rates, many investors began investing in US certificates of deposit (CDs) due to the higher relative yields being offered and also due
to heightened concerns about the volatility in the bond markets. With the Federal Reserve close to ending their interest rate tightening cycle we believe it may benefit investors to add exposure to bond funds. Over the last 40 years, CD rates peaked near or at the end of the last six Fed tightening cycles. Historically in the twelve months after CD rates peaked (dates shown below) corporate, short- and intermediate-term bond funds have generally generated stronger total returns than CDs. While bond market volatility may continue, the end of the Fed hiking cycle may provide a backdrop to start adding exposure to bond funds to existing CD allocations.
Generally, investing in CDs at peak rates left money on the table
One-year subsequent total return from peak CD rate (%)
It may be time to consider adding credit and duration exposure to help drive long-term value.
[panel style=”default” text_align=”left”]11 Short-Term Bond, Core Plus Bond and Corporate Bond represent Morningstar category averages. See below for additional information.Source: CD rates from Bankrate.com. CD rate dates are from month that 1-year national average CD rates peaked. For CD return, money was invested at the peak 1-year CD rate for that period. All other data from Morningstar Direct. Please see the back page for Morningstar Category definitions.[/panel]
Opportunity Costs
While CDs generally have offered more stability, that stability may come with a cost. As demonstrated in the chart below, bond funds have generally delivered more growth (green boxes) than CDs during the periods highlighted below. Moreover, very few investors can successfully time the market, and waiting for the right time has historically meant missing the best days of a market rebound. The opportunity cost can be substantial over time.
Growth Opportunity with initial $100,000 investment2 when investing at peak CD rates
2Growth Opportunity represents the Morningstar category average total returns, reinvesting all income and capital gains distributions. Green boxes in table depict time periods where the category outperformed the CD total return and red boxes depict underperformance.
©2023 Morningstar, Inc. All Rights Reserved. The Morningstar information contained herein; (1) is proprietary to Morningstar; (2) may not be copied; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. CDs are FDIC insured and have principal and interest guarantees but offer no opportunity for growth of capital or income. The principal value and return of an investment in mutual funds will fluctuate with changes in market conditions. Bonds generally offer higher income than either CDs or money market funds.
Morningstar Category Definitions: Short-Term Bond: invest primarily in corporate and other investment-grade U.S. fixed-income issues and typically have durations of 1.0 to 3.5 years. Core Plus = Intermediate Core-Plus Bond: invest primarily in investment-grade U.S. fixed-income issues including government, corporate, and securitized debt, but generally have greater flexibility than core offerings to hold non-core sectors such as corporate high yield, bank loan, emerging-markets debt, and non-U.S. currency exposures. Corporate Bond: concentrate on investment-grade bonds issued by corporations in U.S. dollars, which tend to have more credit risk than government or agency-backed bonds.
CDs are FDIC insured and have principal and interest guarantees but offer no opportunity for growth of capital or income. The principal value and return of an investment in mutual funds will fluctuate with changes in market conditions. Bonds generally offer higher income than either CDs or money market funds.
MFS is not an affiliate of OneAmerica and is not a OneAmerica company.[/panel]
Important Risk Considerations: Investments in debt instruments may decline in value as the result of, or perception of, declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall). Therefore, the portfolio’s value may decline during rising rates. Portfolios that consist of debt instruments with longer durations are generally more sensitive to a rise in interest rates than those with shorter durations. At times, and particularly during periods of market turmoil, all or a large portion of segments of the market may not have an active trading market. As a result, it may be difficult to value these investments and it may not be possible to sell a particular investment or type of investment at any particular time or at an acceptable price. The price of an instrument trading at a negative interest rate responds to interest rate changes like other debt instruments; however, an instrument purchased at a negative interest rate is expected to produce a negative return if held to maturity.
Keep in mind that all investments, including mutual funds, carry a certain amount of risk including the possible loss of the principal amount invested.
Madison Poole | 208-898-7668 | www.madisonpoole.com
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