A CD experiment

Investing Strategies Bonds & Fixed Income Investments
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I have not been able to find any good very short-term places for some of my money. This is money that needs to remain mostly liquid, but not so liquid that it needs to be in a day-demand account (money market, savings, checking, etc).

Here’s the experiment I just did. I bought 250 CDs (CUSIP 38151PHY0) on the secondary market that are 3-month CDs and pay an interest rate of 3.75% and mature on 5/19/26. Here are the numbers:

Cost right now was $251,673.63, that’s $249,850 for the CDs and $1,823.63 of accrued interest. On 5/19, I think I will receive $2285.96 in interest and $250,000 in principal.

The IRR calculation is here:

Date Cash Flow
4/30/26 -251,673.63
5/19/26 2285.96
5/19/26 250000
IRR 4.78%

I was absolutely shocked that my lowball bid was accepted. Maybe it was accepted because I was willing to take the entire inventory off their hands? The ask was 99.992 with a size of 250(10), total of 250, minimum order accepted 10. I bid 99.94 and it was accepted immediately (whenever my bid is accepted immediately I second guess myself and think I should have bid lower, ha.)

My question is, despite my calculation of a 4.78% IRR, is that roughly equivalent to a daily rate? Or is that some other calculation? It’s certainly better than 3.3% in the money fund the money was sitting in, but how much better?

Also, if lowball bids are sometimes accepted, then perhaps I will try it again. Maybe even regularly. But it is important to note that because brokers take a “markup” of a fixed amount (I think it was $50, but it may have been more), in order for any of these short-term remaining instruments to be worth buying, you have to buy them in large quantities.

But take all this with a large grain of salt. My previous experiment with bonds was an utter failure (the entire saga was posted here) because I hadn’t taken into account that it matured on a Saturday but I didn’t actually receive the money until the next Monday. So that dropped the yield down to roughly equivalent to a money market fund. And it shows that the bond market is ruthlessly efficient. Maybe the CD market isn’t that efficient.

[EDIT: I had some small errors that I corrected above]

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The experiment worked! The cash flows were indeed exactly as shown above and I earned 4.67% from this “CD stub” instead of 3.33% in the brokerage money fund!

And I’ve bought other CD stubs since then, the lowball offers are rarely taken, but once in a while they are.

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I think that because this market is rather small with as lot less volume that you are more likely to find deals like this - especially in a scenario where someone is trying to get out of their brokered CD early.

With the explosion of online no-fee trading, I have seen a significant increase in people asking about these so it stands to reason a lot of people are buying them without a good understanding of their lack of liquidity or the need to sell them vs redeem them early.

Question for you, do you randomly search for these opportunities or have you built some sort of notification tool when they are offered for bid? If you have automated your process, what broker are you using? I promise not to compete with your next offer. :slight_smile:

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Sadly, I have to search for them manually. There is usually a list of a few hundred available and I have to scan the list manually. Because there is a broker fee of $50 (maybe $100, not sure exactly), I can only buy those that have a large quantity available, otherwise the fee eats up any preferable yield (or all the yield in many cases). So my first pass scan ends up being pretty quick because I simply look for those with 100 or more ($100,000 or more principal value) on the ask side. Then I place bids for all of them. The reason I do all of them is because the odds of my [lowball bid being accepted is very low. Once day a few weeks ago, I place bids, but they weren’t lowball enough and 3 of them were accepted right away! Lately I’ve been using Fidelity, but Schwab is similar. I haven’t tried IBKR yet because their interface is so bad I don’t even want to login to check. Vanguard is also an option, but they charge more fees and their user interface isn’t very good.

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I’ve continued this experiment since posting this post and have purchased 50 secondary CDs so far. I’ve had varying success with yields between 3.8% and 5.5%. Mostly between 4.05% and 4.35%.

One recent purchase is a CD from Leader Bank ( CUSIP 52168UPH9). Never heard of them, but a quick search (AI really helps here) shows that they are FDIC insured (I only buy FDIC insured ones) AND are in a quite strong position. For some reason the people on the ask side were very accommodative and I received a nice yield of 4.63% at my bid. In fact, the yield was so nice that I took a risk and went above the FDIC insured limit for this one. Since it matures on July 30, the risk is very time limited so I’m not particularly worried, if it were a 2 year or 5 year CD, I would be a lot more worried and wouldn’t exceed the FDIC limit.

Again, just to reiterate, I am only doing this to “goose” my yield compared to the brokerage money market which is yielding 3.25% or so. For the CD mentioned above (430 CDs, or $430,000) that amounts to about $245 more interest over the 2 week holding period.