I saw a 5.8% yield on a 10 year CD through my Fidelity brokerage account.
The bank can call the rate and I haven’t checked the penalty for early withdrawal but I imagine it would be harsh.
I assume the chances of the bank keeping the rate at 5.8 are slim to none seeing as how interest rates are bound to dip sooner than later.
Which begs the question why would anyone invest in a CD under these conditions? And why would a bank even offer such a high rate knowing fully well it will most likely go down in the current state of the economy.
I want to invest in a 5 or 10 year CD as I am nearing retirement and am in a preservation state of mind. I would take a 5% rate in a heartbeat.
Comments
The bank can call the rate and I haven’t checked the penalty for early withdrawal but I imagine it would be harsh..."
Unlike CDs issued directly by banks to customers, there is not a "penalty (per se) for early withdrawal" of brokerage CDs. That's not the mechanics of a brokerage CD - you cannot just withdraw your money.
If you want out of a brokerage CD before maturity, you must list it for sale on the "Secondary Issues" market.
There are currently hundreds/thousands (?) of Fido brokerage CDs that owners no longer want to own. Virtually none of them are selling now, and haven't been selling for many months. Owners are generally asking far too much for their unwanted CDs and investors are far more apt to buy "New Issues."
Aside: FWIW, I've made a bunch of easy money over the years playing in the "Secondary Issues" market, but have been unable to score a worthy BUY there all of 2023.
Bottom Line: If you BUY a brokerage CD, be reasonably certain (read "absolutely certain") that you WILL hold it to maturity. Your "penalty" for wanting out of it is effectively the inability to sell it on the "Secondary Issues" market and you being stuck with it until maturity. In a best case scenario, you might be lucky enough in the current market to SELL it for a substantial discount (loss).
And FWIW, "callable" is a proverbial four-letter word to me - I have/would NEVER buy or own one.
Thanks for your time, Derf
Thanks @Stillers / One of your better posts.
As a cash resistant investor, I continue to try and get my head around this exotic land of constrained cash. ISTM that something having a fixed rate, a fixed duration and able to be sold only on the secondary market constitutes a bond. What am I missing here?
Anybody know how today’s sharp dip in rates across the board is affecting CDs? I’d imagine a bit of a crunch to get in the door before rates drop further. Are 1 & 2 year CD’s above 5% still available?
NOTE: There is a LOT to know about all this. I'll try to provide the whole enchilada but will surely miss some stuff that perhaps can be resolved via questions.
NOTE: Fido has a very worthy Fixed Income Desk filled with some of the sharpest minds I've ever encountered on all things Fixed Income. Suggest using them as your ultimate source. Depending on workload, they may very well walk you through the scoping. But better to have done some work yourself in advance, allowing you to compare what you developed as a possible BUY to what they KNOW are the best offerings on the table! And no, I'm not providing their number here - readily available by calling main Fido number.
NOTE: BUYing on the Secondary Issues market is a wee bit different than New Issues as respect to your funds flows. You may BUY a 3.00% CP, 3-yr CD for a whopping discount and earn IN TOTAL more than a New Issue 5.15%. The difference? You will be able to internally book a potentially BIG time interest gain at time of BUY, but you'll have 3.00% interest payments over the life of the CD versus the 5.15%. On the flip side, you'll have the Discount in your pocket at the time of the BUY to invest wisely (sic) elsewhere.
Alright, off we go...
First, you need to have a Fido a/c to even view the Secondary Issues offerings.
(Same CDs are usually available on both Fido and VG. No experience with other platforms.)
On top ribbon, go to News & Research
Then Fixed Income, Bonds & CDs
Then CDs & Ladders
Then Secondary CDs (Link is under the current rates)
Enter your Maturity Dates (I'll use 11/2023 to 12/2026, 3-yr, for this exercise)
Note that the highest rate on New Issue 3-yr Call Protected CDs is currently 5.15%
So that will guide me to look for something better than 5.15%
Enter at least 5.15% as the minimum Ask Yield to Worst
At the Show More Criteria link
Enter a Price & Coupon max of something near but under 100 (I'm using 99.908)
NOTE: Anything above this ain't worth looking at - selling at a Premium!
Select Yes for Call Protection
Enter other desired variables there if any
Press See #### CUSIPS
You are now In The Game!
Sort data in descending order by Ask column, Price and/or Yield to Worst
Note: Anything priced at/above 99 might be a worthy BUY but that's a general line of demarcation (so-to-speak) to gauge the overall opportunities. I'm always trying to score under say 99 and change, but of course that generally means you are living with a pretty low Coupon CD for its life.
NOTE: Some/many following along are likely getting a wee bit confused by now but it all shakes out in the end!
And to address one other part of the question here...
I'm always shooting for something that's worth my time and effort to qualify as a "good buy."
YMMV.
I've netted anywhere from a % or 2 to upwards of 4%-5% extra proceeds over the years. For example, one BUY I still have the detail on shows I paid $47,739 (priced at 92.931) for a $50,000 CD for an effective Discount of 4.52%. Yeah, after all of the funds slushed through over the CD's life, that was worth my time and effort!
Gonna post this much now so this stuff ain't lost.
Will follow-up with another post picking up from here.
I made a bunch of Edits in there, so in case anyone is following along you might want to re-read it. Will try to get back to this later today or tomorrow.
I’ve got a fair amount of cash in Fidelity money markets but their yields could drop very quickly if interest rates start falling. I’ve also been laddering Treasuries but their yields are generally lowering than CDs and they are more troublesome to buy (although easier to sell before maturity.)
I've netted anywhere from a % or 2 to upwards of 4%-5% extra proceeds over the years. For example, one BUY I still have the detail on shows I paid $47,739 (priced at 92.931) for a $50,000 CD for an effective Discount of 4.52%. Yeah, after all of the funds slushed through over the CD's life, that was worth my time and effort! "
First question , how long did you have to hold this CD in order to collect the $50K ?
Holding period would have some bearing on how good of a deal it was.
Wouldn't the brokerage take advantage on this instead of passing it down to it's customers ?
Thanks for your time, much appreciated.
These threads about CDs, started by posters with limited knowledge about brokerage CDs, can be very complicated, especially when the OP provides minimal information about the details of their personal financial situation and investing objectives.
You may have missed that @hank duly asked on Nov 2:
Anybody know how today’s sharp dip in rates across the board is affecting CDs? I’d imagine a bit of a crunch to get in the door before rates drop further. Are 1 & 2 year CD’s above 5% still available?
Well, we got some of our answers!
A HUGE move in 10-yr Treasury this week caused potential CD BUYers of ALL durations to act.
https://www.cnbc.com/video/2023/10/20/first-time-seeing-treasury-yield-move-like-this-in-20-year-career-says-exante-datas-jens-nordvig.html
https://www.cnbc.com/video/2023/11/01/u-s-10-year-yield-falls-sharply-following-better-than-expected-treasury-announcement.html
NOTE: There was a similar, though even more dramatic run on ALL CP CD offerings earlier this year, following a previous 10-yr plunge. After that run the CP CD cupboards were completely bare! (There are still a few left this time!)
Over the next several months after that prior plunge, and right up until last week's action, ALL rates had moved UP to their respective YTD highs. This time though, IMO, FWIW, we are now likely past peak CD rates.
There will be plenty of, new, New Issue offerings posted next week. It will be interesting to see just how far respective maturities rates have fallen due to the action on the 10-yr this this past week. Thenwe'll have all of our answers to the great questions posed by @hank!
All the more reason to
(1) looking forward, get up speed on how to play in the Secondary Issues sandlot, which is where I will be spending considerable time as several rungs fall off our ladder in Nov-Feb and
(2) in retrospect, have already bought longer duration CDs (that is, 3-5-yr) as I had been suggesting on other prior CD threads.
But, so as to NOT undermine what I posted...
Not sure what time you were buying yesterday, but cupboards were virtually bare on many durations by COB Friday, similar to what can be seen in the negligible Fido offerings across all durations this AM.
Here are four fixed rate 2 year-ish CDs offered by three banks direct to customers (figures are APYs):
5.8% (18 mo., Seattle Bank), 5.6% (24 mo. Newtek Bank), 5.5% (24 mo., Seattle Bank), 5.4% (24 mo. MapleMark Bank). The link below compares the terms of each offer and the health of each bank. (Bank health matters because if a bank folds, an acquiring bank can reduce the CD rate.)
https://www.depositaccounts.com/banks/compareproducts.aspx?ids=415090,406717,19800,411223
To address @hank's difficulty about wrapping one's head around brokered CDs that can only be traded, not redeemed ("put"):
What one considers cash or cash equivalent varies from person to person. There is an FASB definition (that I'm not finding on a quick search now), though here's a Texas page that gives some examples:
https://fmx.cpa.texas.gov/fmx/training/wbt/cashflow/281.php
For me, a cash equivalent has three attributes:
- Safety. This can come from issuer (e.g. Treasury), from insurance (e.g. NCUA), or a combination of security quality and short maturity (e.g. MMFs)
- Liquidity. The ability to convert to cash in a short amount of time. CDs acquired directly from banks satisfy this unless the issuing bank prohibits early withdrawals.
- Stability. Bonds fail this, because their value is determined by the market. Directly sold CDs pass, because even with a withdrawal penalty their value is known ahead of time because the penalty is fixed.
A curiosity perhaps, but Fidelity lists secondary market CDs under bonds. You can a CD search page equivalent to the one that stillers gave by going to Bonds rather than CDs & Ladders. CDs are on one of the bond tabs you find there. News & Research
Then Fixed Income, Bonds & CDs
Then Bonds
Then CDs (tab)
One disagreement that I have with FASB, Texas, etc. is that if I buy a 12 month T-bill, then after nine months or so, I do consider it cash. The "official" rule is that if you buy a 3 month T-bill, it's a cash equivalent, but if you own a Treasury that over time ages down to three months to maturity, it's not a cash equivalent. I'm sure it makes some difference to the accountants, but to me, a T-bill with three months left is just that, regardless of how it got to there.
ISTM those “still available” higher yielding CDs are probably a “lag effect”. Likely to disappear in a matter of days. I agree that the concept of what constitutes “cash” is somewhat in the eye of the beholder.
I want to transfer some of my 401k currently in Fidelity (currently the money market) to Ally but I would have to get in a Brokerage fund which I don’t want to do. Since I definitely do not want a brokerage CD, could I not open a bank IRA in another bank same as Ally? That would give me more liquidity and safety compared to brokerage CDs. Stillers fueled my concern about having to sell my CDs instead of withdrawing quickly albeit paying a penalty.
So I currently have a 4.5% one year CD at Ally which matures in February unfortunately as I would like to get a Ally 5 year CD at 4.1% but having to wait until February will undoubtedly lower that rate.
I would also like to open a bank IRA elsewhere - 5 year term. The rest I will leave at Fidelity as I am still working and our 401k is with them.
Very confusing I know. Any further info would be greatly appreciated!
You can rollover/direct-transfer 401k/403b into a Traditional IRA at bank or fund family or brokerage. Find out where is the problem - at Fido or Ally, then ask for a supervisor. Transfer to bank IRA may be less common (because of lesser flexibility) but it should be doable.
https://blog.lendtable.com/news-and-blog/the-3-best-places-to-roll-over-your-401-k/
Maybe I'm naïve, but I guess I don't understand the concept of opening an IRA at a bank having little flexibility for investing and less return on savings accounts and CDs. I think msf has a good and reassuring post on brokerage accounts above, but, to each their own...
Also I’m not sure but I’ve heard I would have to pay a brokerage fee which I wouldn’t have to in a bank IRA.
I'm not trying to convince you not to follow your plan. I just don't understand your thought process... Not that I need too.
FWIW, I will rolling over some CDs starting in the next two weeks as some rungs mature. There are still a coupla New Issues left in the Fido inventory (after last week's shake out) that meet my respective hurdles for their maturities. But there are also a coupla Secondary Issues that I just might BUY instead. I will be massaging those numbers in detail and will provide a summary of my decisions.
@Jan: There are NO commissions (fees) charged to the BUYer of a Fido or VG New Issue CD. They both charge the same % fee on Secondary Issues BUYs. As noted previously, for example, on the BUY of a $50K Secondary Issue CD, the fee at both is $50. That fee of course needs to be accounted for in determining which BUY is better, New or Secondary Issue. FWIW, I have never and would never pay a fee for a New Issue CD. I have however many times over the past 15 years happily paid the (IMO) nominal fee on Secondary Issues in order to increase my effective yields over those then offered by New Issues.
VG: Bought a New Issue CD last week that met my hurdle. No worthy Secondary Issue opportunities at the time of my BUY.
Fido: Bought a New Issue CD Monday that met my hurdle. There were some worthy Secondary Issue opportunities available then but none that were good enough to best the New Issue. Still looking to add one more rung and may well go the Secondary Issue route on it. Have been trying some low-ball offers to juice the effective APY but so far no takers
Overall: I've been building CP CD ladders for 15 years. HUGE drops in inventory from the BIG 10-year event earlier this month that only happen with BIG events like that. Some significant drops from the peak at the 3-5 year levels. HUGE amount of BUYing New Issue as they came on line yesterday. We appear to be past the peak. If you snoozed, you losed!