How High Will It Go?
 

The Fed rate, that is. Many of us remember the 1970s and 1980s and what happened back then, high inflation, very high interest rates.

How can a portfolio be positioned in preparation?

Any ideas or suggestions?

While interest rates are rising, buy only short term bonds and CDs, 2 year duration or less.

Makes sense to me as long as you want to stay out of the market.

Yep. Had a bond mature today. Immediately rolled into a 1-year Treasury at 5.04%

We're not collecting retirement yet so I have bonds that mature every month. If we need money fast it's always less than a month away.

Our actual retirement funds are still predominantly in the market.

Watched ABC (Australia) this morning they are also expecting more rate hikes for Central Bank unemployment rising from 3.5% to 3.7%.

This was definitely the right approach for the last 12 months. The question is will it continue. If you look out on the yield curve, it doesn't seem like it will last. I think we have another 3-4 months of higher highs on yields and then I'm locking in the rates for 5-7 years.

My approach has to build a bond ladder by purchasing Treasury bonds that mature in 12 months or more and have a 0 to 1% coupon interest rate. That way my interest income is very low and the rest of the bond income is taxed as capital gains. (this minimizes my federal income taxes) I have been buying bonds for more than 1 year now and have some maturing every 2 or 3 months.

Not sure I understand your post. Typically, if you buy a new Treasury bond and hold it until maturity, you will pay income tax on the interest earned annually, regardless of the term of the bond. There are no capital gains. The only way to earn capital gains on a Treasury bond is to buy it at a discount and sell it for a higher price than you paid for it. Are you buying over-the-counter bonds at a discount?

I remember the fed rate got up to about 19% in the early 1980s. Those were crazy unstable times IMHO. These are crazy unstable times, too, but for different reasons and in different ways. I have no idea where it will go so remain defensive, in short term T-bills except for good solid stocks I have held a long time such as BRK.

I remember in the 80's when interest rates were high.
I also remember leaving work one day when interest was 19%
Went to the bank and borrowed $5,000 at 12% and invested it at 19%.

Ay.... to be young again.

Borrow at 1% and invest at 2,3,4%. This is the main reason why we are in an inflation crisis. The fed kept rates too low for WAY too long. Do you remember when rates were actually negative in certain countries? Why wouldn't you borrow free money? We are the land of consumerism. Of course we are going to borrow and spend. Household debt just reached a record 16 TRILLION. Household debt surpasses $16.5T in Q3 amid inflation, rising demand: NY Fed report | Fox Business. Of course companies are going to borrow to grow their business. Heck, even Apple is borrowing money with a staggering 51 BILLION dollars in cash. Something is rotten in the state of Denmark and it's not my $1 eggs.

buying an interest bearing bond at a discount means that, there is a taxable gain on the basis and an interest income on the interest. they are taxed at different rates. generally you don't recognize the gain until maturity. A zero coupon bond by definition the discount is the the interest, which may get taxed annually as interest. . i am fuzzy on that while drinking my coffee prior to going to home office to work.

However, that is considered efficient investing whereby you are always maximizing wealth and minimizing future taxes. . . this is not a tax avoidance scheme as in not accepting high income/selling for capital gain as one has to pay more taxes, which is regressive thinking.

As far as inflation goes right now, goods inflation is declining, energy and food is declining, but home owner equivalent rent, ie rent increases is the bulk of the increase, along with services labor. So, how does this impact the economy?

First, rising service incomes and falling goods prices is a tailwind for the working consumer, which is why Jan retail sales post christmas was so strong. Good for the economy in general. . . Now, the gov't brain trust changed the inflation comparative basis for CY23 and so the increases might not last as long and then inflation falls like a rock. that is the best news for buying low coupon rate high discounted basis bonds for huge relative capital gains. . .

As far as stawks go, consumer goods sector will go well, industrial/mfg will recover, etc. and large financed purchases will not, such as cars, homes, banks for loan income, and slowing discretionary sector. So the market is in a large sideways range, where there will be more chop and derivatives influences between like 3600 and 4200, not exactly but conceptually, depending upon the earnings and the near term economic signals.

So for many, and same for me, its best to just sit and wait and collect 5% interest and dividend income, until the market presents an undervalued dismal outlook p/e ratio. . . if the market long term return is 8%, maybe 10%, then 5% when there is slow/no growth in the market really good. . prior to putting more money into the market. Those in the market, just stay put, as a crash is highly unlikely unless there is a nuclear accident in asia / taiwan . .

future former finance manager with more to say about overhead transmission lines

on a tech note: Microsoft's corporate Office 365 annual renewal increase starts at 15%, and their whole goal is to sell storage space with all the f* backup copies every time you open and change one item. . .

5% interest risk free is too good to pass up. I just locked in a MYGA @ 5.4% for 5 years in a retirement account. It's my first foray into annuities, so I didn't commit much.

My amortization book had rates up to 23% back then. Owner financing was 12-13%. Cash was king when buying property.

Why?
 

the question is why use an MYGA annuity instrument for this purpose in an IRA? What is the advantage over buying 5 year CDs, 5 year treasuries or 5 year corporate bonds with similar interest rates?

Second, did you pay a front end load fee for this annuity?
Third, since there is no taxes in an IRA, why pay for a tax deferred annuity?

thanks, just curious as to what am i missing as this is not my first, second or third choice for IRA instruments. .

The answer is simple. The salesperson delivered a great, but dishonest, sales pitch and made a huge commission.

According to Federal law,

"All financial advisors who provide advice regarding retirement plans must act as fiduciaries and put their clients' interests ahead of their own. The new rule is designed to help investors avoid conflicts of interest that can result in lower returns, higher fees, and other adverse outcomes."

In my opinion, recommending a taxed deferred annuity to invest IRA funds, which are already tax deferred, is not acting as a fiduciary.

The best I could do on a 5 year CD is 4.7% (any higher and they are callable), T notes 4.1% and I could get close (low 5's) at A- corporates but not interested. No fees, so I really didn't "pay" for the tax deferred aspect.

Obviously, the answer is NOT simple since you make assumptions and accusations that are incorrect. Also, if a tax deferred product gives you the best ROI for your time horizon, risk profile and tax implications, who cares if it's in an IRA.

According to a couple friends who are big boys in banking and mutual funds, interest rates will be lower by year’s end than now, the inflation rate is going to drop a lot, and if there is a recession, it will be short and small. Paul Krugman is saying the same, and some analysts in the WSJ, and I hear also some major European banks. Maybe they are all just trying to raise our spirits, but it was enough for me to put everything back in stock-based mutual funds.

I prefer to purchase Treasuries on the secondary market (Fidelity) and not newly issued bonds. A bond that was issued at 1% will trade at a discount so that its total yield to maturity (interest plus capital gains) is similar to current yields (about 4.6% for a 2 year t-bill) … So if I buy a 1% bond that matures in 2 years; I will pay taxes on the 1% interest yearly. When the bond matures in 2 years, I will have a long term capital gain of (4.6% - 1%) x 2 = 7.2% when i file my taxes

Not going to be getting myself in jail for being political but I believe the time you were referring to is 2018 to 2020. I seem to recall a lot of "tweets" by a particular individual strong arming the Fed chair to keep the rates low… It just so happened there was an election on the horizon at the same time. Hmmmm.......
Pretty sure history will too put this in the proper perspective.:mornincoffee:

Wife and I had reached the stage where we were serious investors in the 80's.
Gave us the early retirement and comfortable old age we enjoy now.

"God bless the 80's!"

And
 

And you want investing advice from a community board full of +60 people?? Really. JMHO but there are people that you pay to manage your money.

Wow. A couple of big boy friends in the investing world. Gotta be solid info there.

I agree about BKK......good long term investment.

This graph shows the fed rate was brought way, way down in 2009 - historical lows? - and was held there until late 2015, early 2016 when it started to be brought back up into a more normal range. Then it was brought back down to almost nothing again in 2020. Federal Funds Effective Rate (FEDFUNDS) | FRED | St. Louis Fed

this is called tax efficient investing, whereby you buy for capital gains versus interest income, using the same instruments, treasury or corporate bonds. .

Agree. The commission on a MYGA is about 1%. Certainly not “huge”. I have yet to see a MYGA that does not have a higher rate than a CD, often substantially higher. In non-qualified accounts, the interest is deferred until the end of the contract and can be rolled over to a new MYGA, further postponing taxes on the interest. In qualified accounts, it doesn’t matter. I have purchased a number of MYGA products over the years (qualified and non-qualified assets) and would never consider a CD. My non-qualified MYGA allows a 10% withdrawal yearly with no surrender fees.

I'm curious. What is wrong with +60 people?

A 1% commission can add up very fast. There is no fee AND no commission for the MYGA I purchased. I won't go into details about how I know that's fact but it's one of the very few annuities offered by Equitable (AXA Equitable) that is structured in that manner. However, the other 99% of annuities they offer can carry high fees and 1-2% commission. Annuities are certainly not for everyone and the "devil is in the details".

True and a lot of stock brokers make their money by "churning" you. No one on the forum here is doing that. And 60-plus people have great experience and many are still sharp.......not me, but others.

Paul Krugman is GOLDEN!

Annuities are a great financial investment, for the salesman. Reminds me of cousin brucies sales pitches.

I-bonds currently pay 6.89%, fully backed by full faith and treasury of US Government. Drawback is that you can only invest $10,000 per person however you can also “gift” I-bonds to another individual.

You can also overpay federal taxes by $5,000 and get them as payment.

I have several MYGA’s, including one from Equitable.
The agent I use tried to steer me to indexed annuities which have commissions in the 6-10% range. I shut that down real quick. Many agents will not even bring a MYGA up as a consideration in a conversation about annuities. The reason is that the commissions are so low. I realize these can be purchased online but are they not paid to write the contracts?
The last one I purchased had a page in the contract stating he would receive a 0.75% commission on the sale. Nobody works for free. Commissions are already accounted for in the stated rate. Could you expand a bit on the no commission statement?
Thank you!