High Rates for How Long: by Terry Savage
Do you have “chicken money” – money that you want to protect from risk? If so, it should be in short-term CDs, or money market accounts, or short term Treasury Bills – IOUs from the Federal government. Those are the safe places to stash your cash.
When interest rates were so low just a few years ago, savers were actually punished for having “chicken money.” Inflation was higher than safe money savings rates. But as of this writing, you can get 5.5% on a 6-month Treasury Bill.
How long will those high rates last? Should you lock up a portion of your “chicken money” in a 10-year Treasury note – currently paying 4.25%? Short term T-bills pay so much more. But the global bond market that sets the rates on Treasury securities, is betting the Fed will get inflation under control – and that a rate of 4.25% is enough return to offset future inflation fears for the next decade.
Short-term rates are usually lower than long-term rates on the same quality security. But occasionally, when the Fed is trying to slow inflation, they push short-term rates higher, as they are doing now. That typically results in a recession.
Historically, in the Fed’s 110 year history, there have been 18 such tightening cycles – and 89% of them have ended in a recession, according to Investech.com research.
When a recession occurs, demand for money tends to slow along with the economy – and rates will fall. Or, the Fed will typically cut rates to get the economy growing again! But based on Fed Chairman Jay Powell’s latest announcement, that’s not likely to happen any time soon.
Every report, every utterance of a Fed governor is carefully scrutinized for the answer to that question: have they raised rates high enough? Or will they go higher? But aside from the market’s guessing game, how does that impact your personal approach to dealing with your chicken money?
Locking in Higher Rates
The safest thing to do is stick with short-term liquid and safe investments like 3 or 6-month Treasury bills. (Read instructions on how to buy T-bills directly from the government, with as little as $100 and no maximum amount, at this direct link at TerrySavage.com.)
You can schedule automatic reinvestments when the T-bills mature – and accept the rate set at auction at that time.
But if an economic slowdown causes lower rates in 6 months, would you be sorry that you hadn’t purchased a 10-year Treasury note this week — paying 4.25% for 10 years? Or even a 3-year Treasury note, currently paying currently about 4.6%? You can do any of these in your http://TreasuryDirect.gov account with a portion of your chicken money.
The MYGA Alternative
Here’s one other choice to get slightly higher rates for longer. It involves just a bit more risk, but the rates are tempting. With some of your short-term, but safe money, you could purchase the insurance industry’s version of a CD – a MYGA (multi-year guaranteed rate annuity). There is no Federal guarantee of these funds, so you must buy from a strong, highly-rated insurer.
According to Stan Haithcock (www.StantheAnnuityMan.com), several highly rated companies are promising over 5% for 3 years. Plus, some offer 10 year MYGAs with yields approaching 5.4% — and a liquidity feature that allows you to withdraw interest and perhaps 10% of your principal each year. (Interest is not taxed until it is withdrawn.)
There are no big commissions for insurance salespeople in these MYGAs, so no free chicken dinners! You have to go online to Stan’s website or others to find the rates, which change daily and are dependent on your state of residence.
Welcome to the world of interest rates, which can go up or down. And yes, that unknown factor is very similar to the stock market, asking you to look into the future and make a decision now.
The safest thing is to stick with short-term money in T-bills or short term (1 year or less maturity) insured bank CDs – knowing that rates may be lower in the future when they mature. With your chicken money set safely aside, you can then invest some money in stocks or longer-term guaranteed rates.
Dividing up and balancing your assets in that manner lets you sleep at night. And that’s The Savage Truth.