5% makes me a buyer of any Government paper, i.e. treasuries or minus. That is my cruise rate of return with minimum risk, sleep well at night investments.
I still recall my zero coupons TIGR, purchased 1983, 25-year at 13.25%. As you can see, I lightened-up my expectations.
I am at my base level of equities, so I am not pulling money out of that asset class. I will reinvest my maturing ladder at higher rates though, thank you very much.
4% for 2-3 year CD's might get me to move a little,but would have to be 5-7% to entice a big shift
Back in the 80's my 401K offered 16% for 30 years, guaranteed and insured. (Not US 30 yr Treasuries per se, but based on them) I put my cash there, and transferred from my least favorite equity fund. Then I watched rates drop for 25 years. Its not a matter of how high rates go; it's a matter of when do they stop going up?
So that was a great deal, right? It should have been, but the fund went belly-up in less than two years. We eventually (10+ years) got most of our principal back, but nary a dime of interest
CD's are not an alternative to equities. They are an alternative to cash. I started a short term CD ladder (4 rungs, 3-6-9-12 mo) basically when the taper tantrum hit 2-3 years ago. The 5th and lowest rung (current quarter) actually is cash. My latest 12 month rung faces 2.3% coupon. Every time I re-invest a one year, the rate is higher than the 2 year was a year earlier (ie, the second year I do better with new one year rate than I would have done locking in a 2 year. That's the flat yield curve for you
Somewhere in the last 6-9 months the money market funds started to distinguish themselves from the FDIC-insured core cash positions. I probably should have shifted earlier than I did, but most of my core cash is now money market nearing 1% rather than FDIC insured core cash at 0.01% (or maybe 0.08% now)
So yes, I am paying some attention to parking cash, but no, I would not lock in 4% or 5% for 5 years.
I will never trim equities because I want CDs instead. But I might trim equities because I expect price weakness, or because I want consumption cash. And if I trim, I might park cash in CDs or money markets rather than FDIC core cash positions. ( and "never" might lose its certitude if I saw 10% on a ten year Treasury)
[font=Helvetica,Arial,"Lucida Grande",sans-serif]Would you also be looking at US TIPS to protect yourself over the term should you 'guess inaccurately' when rates peak?[/font]
It's the rate on the US 10 yr that you really have to watch. It was over 5% at the beginning of the last financial crisis. I don't think it will get that high before the next recession. The yield curve may even invert at 3% by the end of this year, which would really be pathetic. It's hard to imagine that 3% on the US 10yr could take this economy down. If I had to guess, I would say above 4%.
I have one CD remaining in my account that I bought a long time ago. It pays 5.2%.
So, if my past is any indicator, I might be tempted at something north of 5.5%, but only if I had a lot of cash sitting on the sidelines. At this point I'm 95% stocks with no intention of moving to cash, CDs or bonds.
Right now, I see several banks offering 5-year CDs with APY at 3%+. That's not quite high enough for me to pull money out of equities, but I'm starting to look hard at the extra cash that I have sitting in my brokerage accounts that I was saving as dry powder. At 4%, I think I would start pulling a little money out of equities, and at 5%+, I think I would target around 20%+ in CDs, though I think I would ramp that up over time as opposed to all at once.
I'm sort of happy that people can earn somewhat decent returns from CDs now, but I wonder what effects that will have on equity (and bond) markets?