Buying Secondary Market CDs at Vanguard

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kramer
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Buying Secondary Market CDs at Vanguard

Post by kramer »

I was wondering if anyone had any tips for buying Secondary Market CDs at VBS?

It looks like there is a listing for hundreds of individual CDs and there is a simple bid-ask system and you can sort by maturity. It tells you what interest rate you are getting by bidding a certain amount and also what is the interest rate if you paid the seller's ask price. I am guessing the market is pretty illiquid and there seem to be large bid-ask spreads.

I can't really tell if patience pays off for someone making reasonable but low-ish bids or if many of the sellers simply end up never selling. Any guidance is appreciated.
gabe1955
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Re: Buying Secondary Market CDs at Vanguard

Post by gabe1955 »

Be cautious about buying brokered CDs at Vanguard or anywhere else. They are not the same thing as CDs. See this account by one Vanguard customer http://wernercohn.com/brokered_CDs.html
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dm200
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Re: Buying Secondary Market CDs at Vanguard

Post by dm200 »

gabe1955 wrote:Be cautious about buying brokered CDs at Vanguard or anywhere else. They are not the same thing as CDs. See this account by one Vanguard customer http://wernercohn.com/brokered_CDs.html
While they may not be EXACTLY the same as direct purchased CDs, they have many common characteristics. The most important common characteristic, in my opinion, is that the FDIC backing of an FDIC insured bank applies to both direct purchase and brokered CDs.

Note that for brokered CDs purchased on the secondary market, the FDIC coverage applies only to the face value, so if you paid a premium - part of your "holding" value may be at risk if the bank goes belly up.
ArthurO
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Re: Buying Secondary Market CDs at Vanguard

Post by ArthurO »

CDs are meant to be held to maturity and not played around with. Early withdrawal penalties apply in the banks, and there are clauses that make it perfectly OK for the bank to refuse early withdrawal, these are not exercised but if there is ever run on CDs due to interest rates movements, the banks can refuse early withdrawal.

If you intent to have a fluid money, go with savings account, if you are more greedy (like myself) start a CD ladder and be content with lock period of each ladder step.

if you intend to have your cake (get good safe return) and eat it too (back out of the deal when the financial circumstances become unfavourable) you are out of your mind...

As long as you treat CDs for what they are which is Certificate of Deposit, meant to be locked up for certain period of time in order to offer some premium returns comparing to savings account, you are in good shape, borkered or direct...

Know this fact on the front end, and you don't have to sue anyone later, and if the CDs you are buying are offered on secondary market at discount, well..., it is up to you to research that before you pluck the money into the substandard investment vehicle...
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dm200
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Re: Buying Secondary Market CDs at Vanguard

Post by dm200 »

gabe1955 wrote:Be cautious about buying brokered CDs at Vanguard or anywhere else. They are not the same thing as CDs. See this account by one Vanguard customer http://wernercohn.com/brokered_CDs.html
Let me comment on this Werner Cohn article/opinion. This was over ten years ago, and the FDIC limit is now $250,000. I do most brokered CD purchases online, and in the few cases where I called Vanguard, the broker never even hinted at trying to "sell me" anything. Online, you can very easily see all the available CDs, both original issue and secondary. It is my understanding (and experience) that Vanguard makes no representation (good or bad) on the financial strength of the issuing bank.

It is absolutely true that, for a given maturity, both on the original issue and secondary market at Vanguard, there is a wide range of rates. Seems very odd to me, but that is the way it works. You choose to buy want you select. You might, for example, choose a lower rate because you have maxed out the $250,000 FDIC limit of the bank offering the highest rate. Demonstrating the wide range of rates available for identical (or nearly identical maturities) - looking now at a new issue for a maturity of five years (in October 2019) - I see the highest rate now is 2.20% (just a day or two ago it was 2.40%). I see four offerings at 2.15%, one at 2.00%, and one at 1.80%.
Bob's not my name
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Re: Buying Secondary Market CDs at Vanguard

Post by Bob's not my name »

I must have been out of my mind a few years ago because as trustee for terminally ill grantors I was buying brokered 20-40-year CDs through Vanguard at discounts. Thanks to the death put feature their estates made long term rates, plus the discount, on short term investments. That meant 6% returns on FDIC-insured one-year investments as recently as 2013, when 6% CD rates were hard to come by.
SteveKL
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Re: Buying Secondary Market CDs at Vanguard

Post by SteveKL »

kramer wrote:It tells you what interest rate you are getting by bidding a certain amount and also what is the interest rate if you paid the seller's ask price.
You should note that the yield which is displayed does not include the commission on secondary CD purchases, which at VBS ranges from $1.00 to $2.00 per $1,000 depending on your Vanguard status. When you click through the purchase steps, just before the final click where there's no turning back, the yield is recalculated and displayed to include the effect of the commission. This reduces the yield. The shorter the period until maturity, the greater the effective yield reduction.

Also note that on secondary market CDs, you will need to pay prorated interest from the date of the last coupon payment, up through the settlement date. You will get this money back at the time of the next coupon payment, but it still gets charged to you at time of purchase.

Note that VBS does not charge a commission on new issue CDs, only on secondary market purchases.
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