CDs: Opportunity or Potential Opportunity Lost?

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 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.
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

[panel style=”default” text_align=”left”]Source: CD rates from CD rate dates are from same 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.
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.

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.

[divider style=”solid” color=”#032b65″ opacity=”1″ width=”1000px” placement=”equal”]

Madison Poole | 208-898-7668 |

Know someone who could use information like this?
Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

[divider style=”solid” color=”#032b65″ opacity=”1″ width=”1000px” placement=”equal”] [panel style=”default” text_align=”left”]Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market- weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalization in the FTSE Developed Europe Index. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. Established in January 1980, the All Ordinaries is the oldest index of shares in Australia. It is made up of the share prices for 500 of the largest companies listed on the Australian Securities Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The FTSE TWSE Taiwan 50 Index is a capitalization-weighted index of stocks comprising 50 companies listed on the Taiwan Stock Exchange developed by Taiwan Stock Exchange in collaboration with FTSE. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.