I’ve posted Entry #48 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called What Causes CD Rates to Rise and Fall?
Juicy Excerpt: The primary reason why TIPS and IBonds and CDs were paying such absurdly juicy returns in January 2000 is that stock prices were sky high. When stocks are priced at three times fair value, irrational exuberance is at its zenith. That means that 90 percent of investors want to buy stocks, stocks, stocks, stocks, and price considerations be darned! There would have been no market at that time for CDs paying reasonable, rational rates of return. To sell their CDs, banks had to jack up the returns offered on them to sky-high, once-in-a-lifetime levels.
There are lots of people looking for an alternative to stocks today. So banks trying to sell CDs do not need to offer high rates of return to entice buyers. Thus, investors who are frustrated with years of poor stock returns but not yet willing to let in the painful reality that they were fooled by the Buy-and-Hold marketing slogans are electing to stick with their high stock allocations on the thinking that the rates of return available elsewhere are just not appealing enough to justify moving out of stocks.
The point that they are missing is that stock prices always end up at one-half fair value in the wake of an insane bull market and they do not make their way from three times fair value to one-half fair value in a short period of time. It takes years for investors to come to terms emotionally with what they need to come to terms with to permit stocks to lose five-sixths of their value.