Thursday, July 18, 2013

Where Are the Certificate of Deposit Vigilantes?

Click to enlarge.

We always hear about the bond vigilantes and how they are destined to arrive at any moment. However, as seen in the chart above, the certificate of deposit vigilantes are nowhere to be seen. Why do you suppose that is?

The following chart shows how much more the typical certificate of deposit "vigilante" could earn if they'd simply buy 5-year treasuries directly from the government instead of buying the typical 5-year CD from their local bank. As an added bonus, they wouldn't even need to worry about FDIC insurance.

Click to enlarge.

I participated in February 2011's treasury giveaway, much to the dismay of Jeremy Siegel. No complaints on that one so far. I also participated in June 2013's treasury giveaway (using interest from my purchase in 2011). No complaints on that one either.

I bought intending to hold to maturity. That is still the plan. Meanwhile, investors panic out of bond funds and into cash the instant interest rates go up? I can't really explain it. I guess many don't enjoy earning more interest. Need proof? Can we not see the willingness of savers to accept a mere 0.5% rate on 5-year CDs?

That said, I'm not at all advocating the purchase of a 5-year treasury. For what it is worth, I went out a heck of a lot further on that steep yield curve. Unlike many, I do not believe that this economy can support high real yields either now or well into the distant future. It has there for been my plan to lock real yields in whenever I could and I have been doing so since 2000 (the year I bought my first I-Bond).

This is not investment advice. It's just the opinion of a random anonymous blogger on the Internet. Take it for what it is worth.

Source Data:
St. Louis Fed: Custom Chart


Rob Dawg said...

The Fed manipulating interest rates relates only to the impact on the banking sector. The cash cow that was refinancing mortgages has gone dry. That is a major source of both cash flow and profits for banks and why so many competing mortgage brokers were squeezed out. The 10y needs to revisit under two to preserve bank liquidity and still allow the Fed to slow the pumping of $45b/mo which is becoming ess effective over time.

Mr Slippery said...

Meanwhile, investors panic out of bond funds and into cash the instant interest rates go up?

IMO, bond funds increase the risk of holding bonds compared to buying individual bonds. This is perversely the opposite of stock funds where your risk is reduced. The problem with bond funds is that cash flows into and out of the funds forces purchases or sales that may be poorly timed, realizing capital losses that might otherwise be avoided.

If you own individual bonds, you can hold to maturity and not worry about price fluctuations as long as there is no BK along the way.

Stagflationary Mark said...

Rob Dawg,

Part of me wants to start a bank. I've got a clean balance sheet right now.

I could pay people 0.5% on their 5-year CDs and could simply reinvest that money in 1.31% 5-year treasuries. I'd generate awesome profits for myself using other people's money!

Heck, I wouldn't even need to use fractional reserve banking!

All I nee4 now is a bank name.

The First National Bank of Illusionary Prosperity

Stagflationary Mark said...

Mr Slippery,

IMO, bond funds increase the risk of holding bonds compared to buying individual bonds.

In theory, if one likes all the bonds within a bond fund then one should probably like the fund itself.

In practice, I vastly prefer a bond ladder to a bond fund. The bonds in a bond ladder eventually mature. A bond fund never matures though.

Put another way, you don't want to be stuck holding 20-year bonds 2 weeks before you actually need the cash! A lot can happen in those 2 weeks.

I would also very much agree with you on bond funds vs. stock funds, especially when it comes to U.S. treasury bond funds. One is not getting diversification safety owning a treasury bond fund. If any default (which is extremely unlikely in the foreseeable future), then they probably all do.

Rob Dawg said...

Me and nine neighbors could kick in $100k each. We'd lend out ten mortgages of $800k each to... you guessed it. THe bank has assets of $8m, liabilities of $1m, revenue amazing and solid assets along with deep pocket investors. Winning.

Stagflationary Mark said...

Rob Dawg,

First Exurban National Bank ;)

Rob Dawg said...

In order to cover our exposure we will incorporate "Crimson Permanent Reinsurance."

Stagflationary Mark said...

Rob Dawg,


I know just the thing to lure investors in! ;)

Now this afternoon we monsieur's favourite - the jugged hare. The hare is *very* high, and the sauce is very rich with truffles, anchovies, Grand Marnier, bacon and cream.