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Monday, October 4, 2010

Guest Post, John Chinnock, US Rates

Guest post from John Chinnock, in what I assume is a response to my Sunday post.


I just wanted to offer a few quick thoughts as a brief update. For a longer explanation of my thoughts on investing in the current environment, please see my old post at (link here). In that post, I suggested short to medium term bonds as an excellent investment right now. To further clarify, I do not think rates are going to go much lower. After all, they are getting awfully close to zero already! I do feel though that rates will remain low for far lower than anyone expects right now. There are times when a meager return on your money really is the best bet, especially when risk is considered. If the market were to collapse 20%+ from here (easily possible), then 2.5% in a 3 year bank CD will seem amazing in comparison!

There is another brief advantage of investing in bank CDs that I should point out. Obviously, any investment with zero risk is always optimal if you want to sleep well at night, especially if it ties up a huge chunk of your money. The FDIC ensures that all bank deposits up to $250K are insured. This not only guarantees your safety, but it also creates distortions in the fixed income marketplace that a savvy investor can take advantage of. For instance, right now, 5 year treasury bonds are paying 1.22%, yet you can search and find 5 year CD's that pay 3% risk-free. Therefore you are getting a return nearly three times higher than what the free market says that you should be getting, and with zero risk at the same time! Deals like this do not occur often in the investing world, yet with bank CDs, this opportunity exists all the time. If rates do rise before your CD expires, consider that you have nearly a 1.8% bonus over the free market rate of return to begin with anyway.

Best of luck to everyone, and once again, we should all appreciate Murf for his hard efforts in keeping this blog running, despite his busy schedule.

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