Fidelity’s fixed income section has a way to search new-issue Certificates of Deposit. I chose to search non-callable CDs. All these CDs are FDIC-insured so they are equivalent. I plotted the yield curve.
What shocked me is the huge variation in CD yields at the same maturity from different banks. This is clearly an inefficient market since identical offerings are priced differently.
Fidelity also has a market with over 1800 non-callable secondary-market CDs. Like the above new-issue CDs, these are all FDIC insured. Some are only available in small quantities or very large quantities so the bids aren’t exactly like the new issues. But the variation in yield is even larger.
Anyone buying fixed income should plot the offerings in order to get the best deal.
Oh, it’s definitely inefficient. There are still people who are unaware that you can easily and quickly buy CDs from ANY bank, and instead buy from their own bank. That’s likely where most of the lower yielding CDs are purchased. And, of course, they also list them at brokerages to capture the “sucker” segment of the market.
What I do is simply click on “yield” and it sorts by yield from highest to lowest. Eliminate the callable ones and just pick the ones at the top. There are usually only somewhere between 3 and 10 CDs at the highest rate, so since they are all equal to me, I may as well buy the highest yielding ones. Right now, the highest non-callable CD yields are 5.25% ranging from late '23 through 5/31/24. If you want later in '24, you will only get 5.00-5.05%. If you want '25, you are under 5%. If you want '26, the best you’ll get is 4.6%.
I’ve had no luck with secondary CDs, if they are attractively priced, they get snapped up very quickly or they have tiny lot sizes.
Sorry @steve203, you just illustrated exactly what I was talking about. My point was that you don’t need to go to ANY bank to buy CDs, promotional rate or not. The modern way of buying CDs is in your own brokerage account, and since they’re all FDIC insured, they are all equal and you simply pick the highest rates available at the time/term.
Why would I care about any of these when I can get substantially higher rates at a different bank (or even the same bank in some cases)? For example, right now I can buy a 4-month non-callable CD yielding 5.25% (Santander Bank), or a 6-month non-callable CD for 5.25% (Zions Bancorp), or a 10-month non-call CD for 5.25% (First State Bank), or Bank of America has 3-month 5.1%, 6-month 5.1%, 9-month 5.15%, 12-month 5.15%. That’s better than the “promotional” rates at the branch.
There are 223 new-issue CDs available to me to choose from right now, from an assortment of banks, so if I had $1M and wanted to split it among 10 banks it is trivially easy to do. Each purchase takes less than 15 seconds and a few clicks.
Most of the time, “promotional” CDs are just that, promotions, to get the customers sucked in. And a business (banks in this case) makes money from their customers, and they make more money from their customers with successful promotions. That’s why they do promotions in the first place.
Some quick clarification. Not all banks offer brokered CDs. The list Wendy is displaying includes ONLY brokered CDs and not CDs you purchase directly from the issuing bank.
Brokered CDs, while FDIC insured, can and will lose value, can be illiquid (requires a willing buyer in the secondary market), and cannot be redeemed early from the issuer.
Those are the folks that purchased last year and had to sell at a loss, and likely a substantial one.
Silver lining - those buying such now and that find they need to get out early may be able to sell at a profit as rates fall.
Reasons to purchase directly from the issuer vs a brokered CD:
You need or want monthly income. Brokered CDs rarely pay monthly income. The most common form of income is MAT (at maturity). I would guess that 1 in 10 brokered cds pay on some other schedule, either monthly or semi-annually.
You think there might be a need to cash it in early and don’t want to be subject to the whims of the interest rate market.
Ah, I misunderstood. I thought you were saying a person could simply stroll into a brick and mortar bank and buy CDs. Yes, some, but not all, brokerages offer “brokered CDs”.
Yes, all true. But why would anyone care? A CD is a CD is a CD … as long as they are FDIC insured, and non-callable, of course.
CDs purchased from a typical bank will also lose value if redeemed early. Usually they lose more value than a brokered CD loses when sold on the open market. And that loss of value on CDs traded on the open market IS A BENEFIT to the buyer, and that buyer could be us!
The vast majority of us here hold our CDs to maturity anyway, we purchase them with maturities that match when we want the money to become accessible. But I have no problem buying a brokered CD on the secondary market at a discount, though as I noted above, it rarely works out for me due to size/bid/ask weirdness. But I still try periodically.
Oh, that reminds me of another slight advantage of brokered CDs. Sometimes you can buy an “old” CD with a lower interest rate at a discount, and that turns part of the effective interest into a capital gain (buy a 1% CD at 96.4, it matures at 100.0, the 1% is interest and the 3.6 points is a capital gain). That can be advantageous to some people for various reasons.
Not sure which brokers you’ve looked at, but Fidelity has tons of new-issue CDs that pay monthly.
Looking through the list of CDs, the short-term ones pay at maturity, the longer term ones pay either semiannually or monthly. Treasury bills (1 year or lower) are similar, they pay at maturity. Treasury notes and bonds (>1 year) pay semiannually.
I’m eyeballing the list and it looks like 25% of them pay at maturity, 75% of them pay monthly or semiannually, and I even saw one or two that pay quarterly.
You ARE subject to those whims because the early termination penalty is usually quite onerous.
Before I started buying CDs at a brokerage, I liked CIT bank because they often offered “no termination penalty” CDs, so whenever the rates rose, I could simply transfer the money into a new higher rate CD. They also offered very competitive rates.
My local bank charges a 1% fee if redeemed early. I have some brokered CDs in my book that dropped 10% from initial premium value. That is quite a difference.
“Life” can happen to all of us at any time and even when we don’t plan to cash something in early, sometimes we have to. Knowing that the most one can lose is 1% versus some other unknown amount can be a reason (especially for risk adverse CD buyers) to purchase locally.
That is not my understanding, though I could be wrong. I believe that gains on a CD from either buying at a discount or selling at a premium are treated as ordinary income.
A 1% fee can be VERY high if the CD was an 0.25% CD. That’s 4 years of interest! Of course it’s a bargain if you can invest the 99.00 in a 5+% CD instead of an 0.25% CD. But I suspect that early termination penalties are usually higher than that. Though, I’ve never paid an early termination penalty.
Of course, in the topsy turvy world of near-zero interest rates, a 1% fee could be higher than a 12-months of interest fee. Like the 0.25% coupon CD (probably originally a 3 to 5-year CD) I just saw trading at a brokerage.
This is absolutely true! But paying, let’s say, a 1% penalty (in the form of a lower rate) up front on ALL ones CDs adds up when compared to the occasional CD that may need to be redeemed early.
And generally it doesn’t apply to us here on METAR, we use CDs as tools, not as investments per se, it’s simply a tool that allows us spread out our income stream, and, at least for me, I only use CDs and T-bills to juice returns for near term spending purposes. For the most part, CDs haven’t kept up with inflation, so for anything longer term, there are better fixed income options (I-bonds, TIPS, etc).
The same applies to buying bonds or brokered CDs. It is well known that if interest rates rise, your bond or CD will go down in value. And conversely, if interest rates go down, your bond or CD will go up in value. Another disadvantage of buying CDs directly is that the converse doesn’t hold true. If you buy a CD from a bank and rates drop, the early termination value doesn’t go up.
Cashing in a bank CD early usually entails a significant loss of interest. Depending on the bank, this can be from 9 to 18 months of interest. A brokered CD moves with the prevailing yields. If yields fall, the value of the CD may rise. There won’t be a separate penalty to sell it.
Wendy
@MarkR this statement is worth analyzing during these interesting times.
As you know, I have bought I-Bonds and TIPS in the past since the Fed was suppressing yields below inflation.
At this time, the big question is whether inflation will fall to 2.0 - 2.5% as the Fed intends and the market believes. Some writers think that inflation could fall even lower or perhaps deflation occur (due to demographic pressures and recession).
In that case, TIPS may not be as good an investment as some of the CDs that are available now. It may make sense to extend the duration of CDs if they can be found in the 4.5% range. What do you think?
I haven’t purchased TIPS in a while, but their rates are creeping up again and getting close to the attractive range. For example, the 5-year TIPS is trading at 1.70% right now. Best 5-year CD is now 4.45%. So CD versus TIPS requires an average 2.75% inflation rate for TIPS to “win”. If you think 5-year inflation will be higher than 2.75%, you buy TIPS, if you think it will be lower, you buy the CD. More or less.
Meanwhile the 5-year treasury note is 3.85% and that means that the collective treasury market expects 5-year inflation to be about 2.15%. Most of the time, I have to assume that the collective treasury market is pretty well informed, so that’s more likely to be correct than any guess I could make. So that means that the CD right now is the better choice. And that also stands to reason since many banks are under pressure right now to show deposit growth (as an illustration of “confidence” to the markets) so in this competitive world, they have to pay more to garner those deposits.
