Constant and Completely Inappropriate Advice on CNBC: “Just Buy the 2-Year Treasury”
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Constant and Completely Inappropriate Advice on CNBC: “Just Buy the 2-Year Treasury”

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The recent rise in the Fed Funds rate and in short term rates – and real fear of economic instability caused by Trumputin’s erratic behavior and US imposed sanctions – is leading virtually every talking head on CNBC to advise viewers to “Just Buy the 2-Year Treasury”.

The 2-year Treasury rate today sits at 2.52%.  Rates are higher than they have been in years and, therefore, it looks attractive.  The rationale that is provided for buying is that it is a great yield and that, in the worst case, you will get your money back in 2 years.   That rationale may make sense for corporate managers and endowments with large amounts to deploy.  But, those aren’t really the people who are watching CNBC, and for 99.999% of CNBC’s audience, the advice is wholly inappropriate.

Short-term rates are clearly on an upwards trajectory.  If they were to move dramatically higher over the next six months to one-year, which is possible given the Fed’s guidance and, in fact, probable if you believe that we are entering an inflationary trade war, investors in U.S. Treasuries of all maturities, including short-term Treasuries, will take huge hits to principal if they need to be liquidated.   The main point here is that it continues to be an absolutely dreadful environment for buying any sort of bonds.  To be clear, savings accounts which are already yielding close to 2% are much safer than the 2-year US Treasury.

If you really insist on reaching for yield, a 2-year CD is a much more attractive option than the 2-year US Treasury.  BestCashCow now shows many nationally available online 2-Year CD rates that are at 2.75% or higher.  In certain geographies, BestCashCow is showing rates from local banks and credit unions that are even higher.  So you are getting a much higher yield.  With most CDs you will ordinarily have the ability to get your money back early with the payment of an early withdrawal fee (although not always).  Thus, your risk becomes quantifiable and measured (versus entirely open-ended with Treasuries).   1-year CDs ordinarily have smaller early withdrawal fees (less risk) and are also offering yields that that are almost as high as the 2-Year US Treasury.

BestCashCow always recommends that depositors stay within FDIC limits.  High net worth individuals have a harder time staying within these limits and may be more inclined to consider Treasuries.  However, given the proliferation of CDARS programs, the CNBC advice is inappropriate for all but the wealthiest of these folks as well.

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Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.
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Comments

  • Jason Peltz

    August 19, 2018

    I meant to say interest income is state and local tax exempt. Income on the sale of a bond is state and locally taxable.

  • Jason Peltz

    August 19, 2018

    Treasuries are state and local tax exempt and can make sense for ultra high net worth investors who resident in states like California and New York as well. Jim Cramer has been at this for 20 years and he doesn't know who his audience is. If he were speaking to those people, the advice is sensible. But, I agree. For 99% + of the CNBC audience, the recommendation should be "Go to BestCashcow and find a 2 year CD. The rates there are higher than the 2 year Treasury and you can way an early withdrawal fee and get out of the tariffs lead to massive inflation before 2 years."

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