10 year Broker CDs vs 10 year Treasury

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TheTimeLord
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10 year Broker CDs vs 10 year Treasury

Post by TheTimeLord »

I was taking a look at the broker CDs being offered by Fidelity and came across a 10 yr 3.20% non-callable offering. Is there any reason I would not want this over a 10 year Treasury if I was going to make my purchase July 1?
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lack_ey
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Re: 10 year Broker CDs vs 10 year Treasury

Post by lack_ey »

Liquidity.

Though under FDIC insurance limits this is for most individuals probably a much better deal.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by Call_Me_Op »

Depends upon your goals for this money. There are two risks that non-callable CD's have compared to treasuries of the same maturity - reduced liquidity and future interest is not guaranteed (which is actually a form of call risk). Also, the CD's are taxed by the state whereas the treasuries are not. It you plan to hold until maturity and especially in a tax-advantaged account, the brokerage CD is a fine choice relative to the treasury.
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TheTimeLord
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Re: 10 year Broker CDs vs 10 year Treasury

Post by TheTimeLord »

lack_ey wrote:Liquidity.

Though under FDIC insurance limits this is for most individuals probably a much better deal.
But as Broker CDs they can be traded on the secondary market. So are you just pointing out is may be a smaller less liquid market than treasuries? This is a very meaningful question for me since I have 2 buckets for my money, one pre-SS and one post-SS. Since post-SS is over 10 years away these might fit nicely into that portfolio.
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TheTimeLord
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Re: 10 year Broker CDs vs 10 year Treasury

Post by TheTimeLord »

Call_Me_Op wrote:Depends upon your goals for this money. There are two risks that non-callable CD's have compared to treasuries of the same maturity - reduced liquidity and future interest is not guaranteed (which is actually a form of call risk). Also, the CD's are taxed by the state whereas the treasuries are not. It you plan to hold until maturity and especially in a tax-advantaged account, the brokerage CD is a fine choice relative to the treasury.
I should have mentioned I am planning to hold these in a tax advantaged account that if all goes to plan won't be accessed until after the CD matures.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by Call_Me_Op »

TheTimeLord wrote:
lack_ey wrote:Liquidity.

Though under FDIC insurance limits this is for most individuals probably a much better deal.
But as Broker CDs they can be traded on the secondary market. So are you just pointing out is may be a smaller less liquid market than treasuries? This is a very meaningful question for me since I have 2 buckets for my money, one pre-SS and one post-SS. Since post-SS is over 10 years away these might fit nicely into that portfolio.
It may be a lot less liquid; the secondary market for them is much smaller relative to treasuries. When you want to sell, buyers may be few and you may need to slash the price considerably. I would not buy a brokered CD with the hope to sell prior to maturity.

US treasuries are the most liquid securities in the world. This is partly why demand is so high - and yields relatively low.
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stlutz
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Re: 10 year Broker CDs vs 10 year Treasury

Post by stlutz »

From a market timing perspective, no. 10 year CDs regularly yield ~1% more than a 10 year Treasury. Right now that gap is only about 70 basis points.

Brokered CD rates tend to lag changes in Treasury rates somewhat.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by Sidney »

10 years is a long time. If I were going to lock up a maturity that long I'd be inclined to look at a Jan 2026 Tip - or maybe stretch to 27. Or ladder 26-31.
I always wanted to be a procrastinator.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by lack_ey »

Usually, especially for retirement allocations, one does not need all their money on hand with immediacy, and trading some liquidity for some part of it (i.e. don't go all in, but for a slice) for higher returns may be useful. In any case, it's not like you're locking this up in real estate, collectibles, private equity, or something like that. The reduced liquidity is a concern, but you are not going way down the spectrum to serious illiquidity. If you want the extra 70 bp or so, go for it.

All kinds of other nominal fixed income are also in trouble (regardless of whether or not you sell or want to) if inflation spikes, so this is not especially a problem with this instrument.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by john94549 »

Since you are holding for the "long haul" (as you mentioned), a ten-year ladder of ten-year brokered CDs is optimal. Buy one this year, another next year, and so on. Brokered CDs at ten years are about as good as it gets these days.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by Call_Me_Op »

john94549 wrote:Since you are holding for the "long haul" (as you mentioned), a ten-year ladder of ten-year brokered CDs is optimal. Buy one this year, another next year, and so on. Brokered CDs at ten years are about as good as it gets these days.
That approach is OK for new money, but may not be so good if you currently have money in cash you'd like to invest.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by TheTimeLord »

Call_Me_Op wrote: That approach is OK for new money, but may not be so good if you currently have money in cash you'd like to invest.
Could you expand on your reasoning.
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dm200
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Re: 10 year Broker CDs vs 10 year Treasury

Post by dm200 »

Some very good points made above.

Let me expand/elaborate on "Call Risk" of Brokered CDs. If the issuing bank fails, or is acquired/merged into another bank - the CD may be redeemed before maturity or, in some cases, allowed to continue - but at a lower rate.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by Call_Me_Op »

TheTimeLord wrote:
Call_Me_Op wrote: That approach is OK for new money, but may not be so good if you currently have money in cash you'd like to invest.
Could you expand on your reasoning.
Sure. If this approach is applied to existing funds, those funds will not be fully invested for 9 years.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by nedsaid »

TheTimeLord wrote:I was taking a look at the broker CDs being offered by Fidelity and came across a 10 yr 3.20% non-callable offering. Is there any reason I would not want this over a 10 year Treasury if I was going to make my purchase July 1?
Seeing that these will be in tax deferred accounts and that these instruments will be held to maturity, I would buy the brokered CDs. The biggest risk that I see is that the bank issuing the CD could run into trouble and be taken over by another bank. In this case, you may find the rate on your CD being cut. The second biggest risk is a liquidity risk, you would get a better price on a Treasury than on a brokered CD if you needed to sell for some reason.

The 10 year treasury yield right now is 2.48%. You are picking up 72 basis points on a CD which still has the government guarantee. You could also check into 10 year TIPS too.
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Re: 10 year Broker CDs vs 10 year Treasury

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skepticalobserver
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Re: 10 year Broker CDs vs 10 year Treasury

Post by skepticalobserver »

Call_Me_Op wrote:It may be a lot less liquid; the secondary market for them is much smaller relative to treasuries
Understatement of the year. A brokered CD is a UFO (you friggin’ own it). It's bought to be held to maturity.

The argument for Treasuries is the yield curve roll down: the closer the issue gets to maturity it may increase in value, maintain value, or not significantly lose value. Also, Treasuries are state tax free and, if you’re so inclined, are excellent to use as margin.

Ten years is a long time.
john94549
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Re: 10 year Broker CDs vs 10 year Treasury

Post by john94549 »

skepticalobserver wrote:
Ten years is a long time.
Actually, it isn't. We're 68, and have been investing since our 20's (roughly 45 years).
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Re: 10 year Broker CDs vs 10 year Treasury

Post by muddlehead »

*** "Is there any reason I would not want this over a 10 year Treasury if I was going to make my purchase July 1?" ***

Full disclosure. I am perhaps the biggest fan of FDIC insured brokerage firms CD's on this board. The answer to your question is no. Only make sure you are within FDIC insurance limits. (Schwab only offers CD's from FDIC insured institutions. Should be the same with the other brokers - but, check.)
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Re: 10 year Broker CDs vs 10 year Treasury

Post by TheTimeLord »

muddlehead wrote:*** "Is there any reason I would not want this over a 10 year Treasury if I was going to make my purchase July 1?" ***

Full disclosure. I am perhaps the biggest fan of FDIC insured brokerage firms CD's on this board. The answer to your question is no. Only make sure you are within FDIC insurance limits. (Schwab only offers CD's from FDIC insured institutions. Should be the same with the other brokers - but, check.)
Am I correct to assume FDIC limits apply to holdings of a specific institutions CDs and not my total brokerage CD holdings?
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Re: 10 year Broker CDs vs 10 year Treasury

Post by trueblueky »

TheTimeLord wrote: Am I correct to assume FDIC limits apply to holdings of a specific institutions CDs and not my total brokerage CD holdings?
You are correct.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by Sidney »

john94549 wrote:
skepticalobserver wrote:
Ten years is a long time.
Actually, it isn't. We're 68, and have been investing since our 20's (roughly 45 years).
I think the "long" refers to duration of exposure to inflation risk for a nominal security, not personal duration (lifespan).
I always wanted to be a procrastinator.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by obgyn65 »

To the OP: I would buy the CD.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by dm200 »

trueblueky wrote:
TheTimeLord wrote: Am I correct to assume FDIC limits apply to holdings of a specific institutions CDs and not my total brokerage CD holdings?
You are correct.
Yes - this is true. The one, very unlikely, exception would be if you held the FDIC limit at two different banks, and those banks merged (or similar) - you could then be over the limit. There is some kind of "grace period" in such a case. This possibility, however, is so unlikely that I would not worry about it.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by jimkinny »

I own some 10 year brokered CDs (now 9 ytm). I intend to buy some more once some other CDs mature later this year.

Consider buying some secondary market CDs. New issue CDs (at Vanguard) are available for 1-5, 7 and 10 year (not sure of some of shorter maturities) but 5, 7 and 10 for sure.

You can also buy secondary market CDs with ytm 6-9 years. The only caveat I am aware of is that if the issuer is taken over by FDIC, the CDs will not be paid/redeemed by FDIC above par value. So, if you pay above 100, you can lose principle. There have been posts about this which likely use better language so do a bit of research to confirm this.

I have never tried secondary market CDs bidding. I have bought secondary market CDs where the seller lists the price /ytm that is acceptable with no opportunity to buy at less than that price.

10 years is a long time, imo but rates are what they are. The last i looked (months ago) the feds inflation expectation was 1.7/1.8%, with a target of 2%.
Of course, if interest rates go to 5% on a 10 year treasury in 5 years, I will have some regrets but who knows what will happen.

jim
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Re: 10 year Broker CDs vs 10 year Treasury

Post by slickwillbo »

stlutz wrote:From a market timing perspective, no. 10 year CDs regularly yield ~1% more than a 10 year Treasury. Right now that gap is only about 70 basis points.

Brokered CD rates tend to lag changes in Treasury rates somewhat.
Because of this lag, there is a 100 bp spread on 10 year CDs/treasuries at Schwab at the moment, and about a 60 bp spread on the 5 year. Today is a pretty good day to buy brokered CDs.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by Dandy »

Liquidity is the key concern - if interest rates go up a few percentages you might find it harder or more expensive to sell the brokerage CD vs the Treasury. I use VG brokerage CDs as part of my TIRA fixed income allocation. They are the last products I will tap when RMDs hit -- in fact I will make sure that I won't own any if they are in danger of being tapped for RMD.

So, you have to go into Brokerage CDs with eyes wide open. You are getting a better yield but there is a reason. Another issue is that you can't reinvest the Brokerage CD interest in that CD like you can with CDs bought directly from a bank. This can be fine in a rising interest rate environment since the normal "reinvestment risk" can become a gain. e.g. you can invest the interest in bond fund that might be taking a value hit due to the rising rates or buy a higher yielding CD.

Treasuries offer an excellent advantage when there is a flight to quality - e.g. all this fuss about Greece. While Brokerage CDs can benefit somewhat during these times Treasuries is a much better place to be. Foreign governments, large corporations, and wealthy individuals, etc can't really put large dollars to work in CDs and probably favor Treasury's liquidity much more than a bit better yield.
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Re: 10 year Broker CDs vs 10 year Treasury

Post by rustymutt »

john94549 wrote:
skepticalobserver wrote:
Ten years is a long time.
Actually, it isn't. We're 68, and have been investing since our 20's (roughly 45 years).
At 59 years old, I don't see 10 years as all that long of horizon, but if I was 84 years old I would.
So age is a huge factor here for older people. 10 years of 3.2% is very stable at the least. :sharebeer
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