Bill Gross channels John Bogle but is Wrong about CDs

Bill Gross have you looked in the window of your local bank?

In Bill Gross’s most recent market missive, “The Lending Lindy”, he makes the following statement:

Most individual investors don’t have the privilege of time nor the choice of risking their investment dollars while being able to recoup it only at .1% money market or CD rates.

From a factual perspective, CD rates are well above 0.1%.  High yielding CDs currently offer yields between 1.1% (one year) to 1.75% (5 years).
  To see a list of high yielding CDs go here.  

Why is Bill Gross so wrong about CD rates?

Well money market funds are yielding very close to zero  percent.  The Crane 100 Money Fund Index (an index which tracks the yields of money market funds) has a yield of only 0.06%. Ultra-Short Bond funds are yielding around a quarter percent. Bill Gross’s statement about low-yields would be correct if one limited their choices to the menu of securities offered by brokerage firms.  However, most investors use banks to save their money.

 

Banks are paying much more than 0.1% on CD and savings products.

According to Bankrate, the yield on a typical one year CD is 0.75%. For a five year CD, the yield doubles to 1.49%.  I think Bill Gross is a little out of touch with the banking experience of a “normal” person. Banks use their “rates” on savings products in the same way that supermarkets use their specials to draw in customers. They are making lots of money from other products, such as home loans, credit cards, and fees. In other words, you can wait the market out for the next few years and earn close to 2% with a bank CD.

 

Bill Gross is right: Keeping fees low will be very important for the next few years

We know that yields will be low for the next few years. The Federal Reserve has telegraphed their intention to keep short-term yields close to zero to at least 2015. When yields do rise, the FED will want them to rise slowly in order to prevent a shock to the economy. Imagine the impact on the market, potential home buyers, and corporations, if the fed was to raise rates by 2% over a year.  Unless inflation is spiraling out of control, the FED will be raising rates by no more that 1% per year. Yields on bonds are likely to remain low to at least 2016.

As government and investment grade bonds are already at record high prices, there is only limited room for price appreciation.
The total return (yields plus price gains) is going to be low.

If your total return is going to be low (or put another way, your upside very limited), then investors are going to need to focus on keeping costs down to maximize returns, as Bill Gross says:

After all, if overall returns average 3–4% annually how can you possibly afford to give 100 basis points of it back?

Bill Gross, I agree. However, your funds and ETFs are very expensive compared to Vanguard’s BND or iShares AGG. Are you suggesting that we get out of the PIMCO Total Return Fund and embrace low-cost indexing? Bill Gross are you secretly a Boglehead?

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