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1-Year CD Rates from Online Banks 2021

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Avoid Municipal Bonds For Now

Those paying taxes this month in States like New York, New Jersey and California have been hit with quite a wake up call over the last few days.

Our tax bills, as a result of the 2018 Republican tax cuts, are much higher, especially since we have lost all sorts of deductions for our state taxes.

Out of the woodwork are emerging two groups of people eager to present their solutions to making April 2020, as compared with this April, a little less painful:

  1. Real estate agents from Florida and Texas.
  2. Those pushing municipal bonds.

I have nothing bad to say about the former, and I am not going to comment about the risks and benefits of relocating to Florida or Texas (I do know that New York spends a lot of money each year checking to be sure that former NY residents have met the required criteria of residency in another state and tracking them down for past taxes where they haven’t).

Rather, I want to address the people pushing municipal bonds and municipal bond funds.    I am going to say, quite simply, that my view is that buying these instruments at this time is a terrible idea for all but the extremely wealthy.  Here are 2 reasons:

First, most people, especially now, need their liquidity and should not tie up large amounts of cash in a low interest rate environment.   One-year municipal bonds - if you can find them – in New York or California have a yield to maturity below 1.40%.   Even if you are in a 50% effective tax bracket, that is still a fully tax equivalent return of only 2.80%, and you can still get 2.80% (or better) in a 1-year CD.   Unlike municipal bonds, however, you can withdraw your money early from 1-year CDs with a reasonable early withdrawal penalty (BestCashCow recommends that you identify CDs with only three month of interest as such a penalty).   As long as you stay within FDIC and NCUA limits, your CDs bear no credit risk.   Check online CD rates here.  Check local rates at banks here and credit unions here.

Second, municipal bond interest rates are extraordinarily low.   You need to go out 30 years to find a municipal bond yielding over 3%.   As a point of comparison, I was purchasing high-quality AA New York municipals in 2009 (during the financial crisis) that were seven years in duration and were yielding over 5%.    As a general rule, I do not recommend that anyone should buy municipal bonds of more than 5 to 10 years in duration under any circumstance.   At the moment, high quality municipal bonds of those durations have tax equivalent yields that, again, do not offer significant premiums over 5-year CDs.  They also are extraordinarily  risky as they can lose tremendous value (even those of intermediate durations) should long-term rates increase.

Bottom line: Wait until you see higher long-term rates before considering municipal bonds.    

Kyle Bass Says Interest Rates Will Be At Zero in 2020

There are many people who believe that the 2008-2009 financial crisis marked a seismic shift in the interest rate paradigm and that interest rates will never go back to a pre-crisis “normal”.

When Jerome Powell became Chairman of the Federal Reserve, he seemed determined to raise rates back to a new normal long-term goal of 3%, and in fact stated that the Fed intended to raise the Fed Funds rate above that level.  But, the Fed Funds rate now sits at a target of 2.25% to 2.50%, and may not be going higher any time soon as Powell has bowed to Presidential pressure.  Some Fed governors and former Chair Janet Yellen have recently come out and said that the next Federal Reserve move could well be to cut.  And, today, Kyle Bass says that interest rates could be back to zero before the end of next year.

The idea of interest rates going back to zero concerns me, as it does many.   It is, indeed, difficult to fathom how we could finally have pulled out of this recent multi-year period where the public at large was forced into risk assets in order to avoid deterioration in their wealth, only now to be heading right back into it.

Kyle Bass is pretty smart and, while he isn’t always right, he has made some very prescient predictions in the past.   Those who can tolerate Brian Sullivan, can watch Bass’s interview here (he is largely talking about China, and doesn’t make this prediction until the end):

While Bass did not got into too much detail about how he formed his hypothesis, he did say he believes that US will experience a slowdown following a global economic slowdown beginning by the end of this year.   One might surmise that he believes the precedent is in play for the Fed to use all bullets in its resolve to fight a global economic slowdown.   The additional reality here is that interest rates around the world remain at or near zero and unless they start to move higher and stay higher, the Fed could need to move rates lower to prevent the US dollar from becoming too strong.   Plus, the President has Chair Powell’s ear and if he remains a free man, it is a certainty that he will be lobbying forcefully for as many rate cuts as possible just in front of the 2020 election

Bottom line: This could be a good time to begin to consider putting some of the cash that you cannot afford to risk into long-term time deposits (Certificates of Deposit).   Check the best 3-year CD rates, 4-year CD rates and 5-year CD rates here.

Jim Cramer Says to Buy CDs

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Amazingly, Jim Cramer, the biggest proponent of the stock market was interviewed on NBC’s Today show the other day and couldn't say anything other than to buy CDs.

It is a video so extraordinary that you need to watch it here.

To be clear, BestCashCow thinks that CDs should always be an important part of a well-diversified, safe portfolio.   We provide the most comprehensive list of the best online CD rates here, and we also encourage folks to look at rates at banks near them and at credit unions near them.

But, we’ve been suggesting people take extreme caution around anything longer than a year, even though two-year CD rates are now above 3% and may attract attention.   In fact, I wrote just yesterday that I do not find a one-year CD at 2.85% APY to be particularly attractive since online savings rates are strong and the Fed is still raising rates.

But, what is quite extraordinary here is that Cramer could be so easily perturbed (to put it mildly) by the recent market volatility.  This is, in fact, the same man who was encouraging people to buy into Facebook at 200, Nvidia at 290, and Amazon at 2000 in November.

I speak at conferences and extol the virtues of CDs, but I certainly wouldn’t tell people to run out of the market here, and I have no intention of unloading my Nvidia or Amazon at this time.

So what is Cramer afraid of?   I, for one, suspect he just trying to create a record of saying everything imaginable in the most vague way possible so that he can point to it and say he was right (especially if we have a 2009 scenario and he winds up on the Daily Show again).