CDs and money-market yields: Too good to eat?

By Jerry Wagner

It was 10:30 p.m. A half-drunk glass of rich and delicious Cabernet remained in the goblet before me as the server cleared away our dishes. The shuffled plates contained the remains of beautifully marbled steak. An inch thick, pink inside, with barely any trim of fat, the selection had been the choice of most of the guests, while I had chosen a filet of sea bass.

At the far end of the table of the remaining dinner guests, a dessert plate was slowly winding its way toward me, tempting each passerby with the chance for a taste. Central among the choices was a slice from a six-layered triple-chocolate cake.

The cake was a sensory delight. Moist dark, milk, and white chocolate layers melded harmoniously. Decadent chocolate buttercream filled the layers, balancing the intensity of the cake. Enveloped in a rich, glossy ganache, it was dusted with a delicate layer of cocoa powder, topping what had to be the ultimate chocolate lover’s indulgence.

The tempting plate reached me … and I passed it on.

Like the delicious Cabernet that went unfinished, the unordered steaks, and the seductive chocolate cake that went untouched, they were all too good to eat.

The timing was not right. While each was an acceptable option early in the day, at a late-night dinner, any one of the three would have left me restless and wide-awake for a portion of the night. All three would have rendered me sleepless all night long.

The temptation of high short-term yields

What’s catching the eyes of investors today are some of the highest short-term yields in decades. One-year Treasurys are close to 5%. This is all due to Federal Reserve tightening that has resulted in one of the steepest yield curves in history.

The rising yields have not gone unnoticed by investors. As Treasury yields have soared, so have the amount of assets deposited in money-market funds. They have quickly reached the highest level in history—nearly $1.4 trillion!

Suddenly, investors’ phones are ringing off the hook. Insurance salespeople are seeking to tie investor dollars up in fixed-rate annuities. Not to be outdone, the local banks have signs plastered on their walls touting their high CD rates. And, of course, the internet somehow finds a way to thrust ads for both types of investment into investors’ faces—they keep mysteriously popping up every time investors do an online search for anything.

These yields are tempting. With most investors experiencing losses in their stock and bond portfolios in 2022, the sales pitches are enticing. But like the most alluring selections at that late-night dinner, the offerings are too good to eat. The time is not right.

The true cost of pigging out on today’s higher yields

Our Research department staff (thank you, Sam Sheeran) dove deep into the record books and constructed a series of graphs to illustrate the true cost of overindulging in the recent higher yields.

Investors usually aren’t frightened out of their equity investments, or don’t seek other alternatives, until the equity market has fallen. So we wondered what the investment results would have been this century if an investor had bought a CD of various terms after a market fall of 10% or 20%. (For illustration purposes, and because of limited historical data on CD rates, we have substituted the yields of Treasury bonds of various lengths for CD rates.)

As the graphs and charts make abundantly clear, the opportunity cost of a meal of high-yielding investments with a fixed duration is pretty exorbitant and should be deemed too good to eat.

Of course, many investors seem to have especially bad timing. Considering this, we also prepared graphs comparing the purchase of CDs at the bottom of a bear market after a 10%-plus decline and after a 20%-plus decline. If last October proves to be the latest bear market low, the 20% chart might be the most applicable now.

Again, the conclusion is obvious: These investments are too good to eat at the present time.

Of course, this is the conclusion for CD and stock market investments at all times (and, according to my nutritionist, the same applies to those rich selections at the late-night dinner). Since the inception of the SPY ETF, an investment in a one-year Treasury bond (taking the place of a one-year CD) would have earned $1,382,710 less on a $100,000 investment through the end of last quarter as compared to an investment in the S&P 500 SPY ETF.

This time around we are also trying to cope with high inflation rates. Adjusting our comparison for the purchasing power of the dollar after deducting the cost of living, as reflected by the consumer price index, the opportunity cost differential is even larger. Tying money up in a fixed-duration fixed-yield investment is especially costly in inflationary times. Inflation protection is one of the hallmarks of stock market investing.

Finally, although the time of day was a good warning sign for my late-night dinner selections, I would never recommend using a single indicator for a market-timing strategy. Yet, by one measure, now is not a good time to avoid equities.

Except for 2008, history suggests that the times when investors have rushed into money markets can be a good time to buy stocks. Even in 2008, that held for the first three months following a 20% increase in money-market assets, like we are experiencing today.

Before you invest, make sure the time and cost are right

In today’s world, we are presented with an incredible array of choices. Whole industries and marketing departments are devoted to making almost anything look tempting. Sometimes it’s even what appears to be the lowest-hanging fruit.

Currently, among the most alluring investments, and easiest to pick, are high-yield fixed-investment vehicles, be they CDs or fixed-income annuities. We have not seen them in quite a while—so they feel new, while stocks may appear old hat.

Yet, two of the most important questions to ask when making an investment are (1) “Is the time right?” and (2) “At what cost?” History tells us that right now CDs and fixed-rate annuities, like that late-night meal, are too good to eat.