US Treasury rates came down dramatically last week, with the 1-year falling from 5.32% to as low as 5.01%, with still more pronounced declines along the longer end of the curve (the 10-year, for example, crashed from 4.55% to 4.20%).

Many are suddenly wondering if they have missed their chance to lock in great rates for long periods of time.

The answer is that you have not.

Your first option is to check CD rates. I wrote on November 21, before the latest move on Treasury rates, that CDs were offering more attractive yields than US Treasury bonds even for depositors in the highest tax brackets of the highest tax locales. The good news is that - at least as of now - most banks have not lowered their CD rates. 

Check one-year CD rates here.

Check five-year CD rates here.

You may find still higher rates where you live.

Check local CD rates here.

A second option is to have a look at US agency bonds. These bonds, particularly those issued by the Federal Farm Credit Bank, the Federal Home Loan Bank and the Tennessee Valley Authority, have the same tax attributes as US Treasury bonds (interest is state and local tax exempt). If you believe that interest rates on long-term US government debt have seen their highs, these instruments may be worth a look as they offer a premium over Treasury bonds that can widen out above 100 basis points if you are willing to go out beyond 10 years. Most of these instruments are callable, but you can mitigate that risk by buying notes that are trading at significant discounts.

I caution again that agency bonds may not be appropriate for any more than very small positions.   The US government has a moral obligation to bail out these agencies if they go into default, but that has never been tested, leaving credit risk that is technically greater than US Treasury bonds. Also, while we may have seen the peak in this cycle for short interest rates, the government's debt situation could make buying any longer-term bonds here more risky.

Your third option is simply to close your eyes and start diving into a portfolio that may include CDs, Treasury bonds and perhaps agencies with different maturities now. It of course is still possible that we may have seen the peak in short-term Treasury yields, but the rates are still attractive versus where they were when 2023 began (or when any other year in the prior 15 began). If you can see past the day-to-day or even week-to-week movements, you may find that when we end 2024 hindsight will show that it was not too late to lock in now.

Now that we are reaching the end of Jay Powell’s tenure as Chairman of the Federal Reserve, it is fair to say that the man has strayed from his pre-chairmanship policy positions when he had emphasized using Fed policy to promote price stability.

After initially raising rates all the way to a target of 2.25 to 2.50 in December 2018, Powell reversed course on August 1, 2019, when he lowered the Fed Funds rate. There was no economic justification for this first action, other than to give in to bullying of an authoritative creature who appointed him. Powell subsequently lowered the rate two more times in 2019 before bringing it to zero in early 2020 as COVID took over. Powell’s actions in 2019 did not save anyone, and his actions in 2020 did not prevent the “Main Street” economy from entering a tailspin.

However, asset valuations have been brought to levels that are basically ridiculous. Apple, the country’s largest company, trades over 28x earnings after subtracting out its cash, when the company traded at 8x by the same metric three years ago (and that was before it had achieved such great market penetration). Other stocks trade at much more frothy levels. And, it isn’t just that 1999 wants its stock market back, but real estate values across the country (outside of New York City) are screaming, bitcoin and precious metals are going bonkers. The Fed is pumping liquidity all over the place and cash cannot be deployed in savings account s or even CDs (in a riskless manner) where it maintains its purchasing power.

Creating asset multiple bubbles is not doing anything for the real economy. It is increasing the disparity between the billionaire class and the rest of us, and preventing assets from being deployed in sensible and functional ways. Unemployment is spiraling out of control and food lines are everywhere.

Most importantly, Fed policy has not promoted price stability. At the conclusion of the Federal Reserve’s last meeting, Powell said that because inflation remains below the Fed’s 2% target, there is no concern about price stability. Hence, presumably, the Fed can keep interest rates at 0% indefinitely.

However, this view runs counter to everything that Powell stood for before August 1, 2019. He always wanted the Fed to act aggressively so that a dollar today would have the same value as a dollar one year from now. Instead, he has left the circumstances where a dollar today will be worth 98 cents one year from now and 96 cents two years from now (if we are lucky).

Powell essentially admitted having failed to back Main Street when he told the European Central Bank’s Forum on Central Banking that “We are recovering but to a different economy.”

The problem here is that we need to recover to the economy that we had where Main Street does as well as Wall Street and small businesses have the resources to employ people.

We need the Republicans to pass a stimulus package. In addition, incoming Treasury Secretary Janet Yellen and the next Fed Chairperson (possibly Lael Brainard), needs to act quickly to reverse current bubbles and economic dysfunction in order for the real economy to heal itself. A 50 basis point increase in the Fed Funds rate or a series of smaller moves might be right medicine to apply here.

Until the Fed acts, stay in savings accounts and short-term CDs, and try to resist the temptation of buying into bubbles.

1-Year Certificate of Deposit offerings remain quite strong. As of the date of this article, there are at least 8 online 1-year CDs being offered at 5.15% or higher. Depending on where you live, you will probably also find 1-year CDs from local banks and credit unions at or above this level. Banks are competing for your money, especially if you are willing to forgo liquidity for one year.

At the same time, US Producer Price Index (PPI) and US Consumer Price Index (CPI) data released last Thursday and Friday indicated that inflation may be below 5%. As a result, market participants have begun to price in an increased likelihood that the Fed will cut the Fed funds rate below its current 5.00 to 5.25% target before the end of 2023. US Treasuries with maturities in May 2024 are now trading at yields between 4.70% and 4.75%.

Even for those in the highest tax brackets in New York City or California where state and local taxes can total 10%, one-year US Treasuries are going to net less after tax than 1-year CDs. Plus, 1-year CDs allow the opportunity to diversify holdings in case of a catastrophic US government default (although it is possible that banks could be equally or more impacted in a default so you should always stay below FDIC limits).

For those willing to go out 18 months or more, the advantage of CDs can be even more attractive. BestCashCow shows at least a handful of 18-month CD offerings at or above 5.00% and US Treasuries maturing around November 15, 2024 are now yielding below 4.35%.