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Bogleheads
Investing Advice Inspired by Jack Bogle
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LeoNYC
Joined: 14 Mar 2010
Posts: 2
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 Posted: Sun Mar 14, 2010 11:00 pm Post subject: Why is EverBank only one offering CDs in foreign currency? |
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I was trying to find the answer to this question for a while and have not been successful.
Clearly, millions of people in the US would love to be able to invest in a CD denominated in a foreign currency that offers 1) higher interest rates than the current 1% or so offered at US banks in US$ 2) diversify their investments 3) protect their investments in the event dollar declines
Seems that EverBank is still the only US bank offering FDIC insured CDs in foreign currencies to the retail customers, albeit at rather high markups, uncompetitive exchange rates and interest rates that are not as high as they could have been. And that service has been very popular.
Obvious question is: what is the catch? Would wouldn't any other bank in all of the US offer a similar service? Not a single one (even HSBC that offers similar accounts in the UK, Australia and many other countries does not offer them in the US). Are there any regulatory complications?
If anyone knows the answer, please let me know. |
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edge
Joined: 19 Feb 2007
Posts: 1051
Location: Great Falls VA
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| Posted: Sun Mar 14, 2010 11:51 pm Post subject: |
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Um, there are plenty of catches.
The most important one is that most US investors probably can't wrap their head around the fact that even though the interest rate on the foreign currency is higher, they might get back less than what they invested in USD. And even if they want to pull out because they see their CD declining in value they cannot do so without additional insult to injury.
There is generally no free lunch in the FX market which is essentially what people buying CDs are betting on.
A CD in a foreign currency is actually a pretty bad product idea except for maybe one in Euro. It is much more convenient and flexible to buy an intermediate or short term international bond fund / ETF. |
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Valuethinker
Joined: 11 May 2007
Posts: 12890
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| Posted: Mon Mar 15, 2010 5:14 am Post subject: Re: Why is EverBank only one offering CDs in foreign currenc |
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| LeoNYC wrote: | I was trying to find the answer to this question for a while and have not been successful.
Clearly, millions of people in the US would love to be able to invest in a CD denominated in a foreign currency that offers 1) higher interest rates than the current 1% or so offered at US banks in US$ 2) diversify their investments 3) protect their investments in the event dollar declines
Seems that EverBank is still the only US bank offering FDIC insured CDs in foreign currencies to the retail customers, albeit at rather high markups, uncompetitive exchange rates and interest rates that are not as high as they could have been. And that service has been very popular.
Obvious question is: what is the catch? Would wouldn't any other bank in all of the US offer a similar service? Not a single one (even HSBC that offers similar accounts in the UK, Australia and many other countries does not offer them in the US). Are there any regulatory complications?
If anyone knows the answer, please let me know. |
My own sense is that big countries, with huge GDPs, just have less need for foreign currencies.
So the market, which is adept at creating the best product for the average consumer, just does not innovate in this direction.
The 'CD' market in the UK doesn't really exist in an efficient and liquid form the way it does in the US. So you have a country with 60 million people, 6-7th highest GDP in world, and yet limited money market options.
You can open a Euro bank account though. But Europe is merely a train ride or short flight away.
As other poster notes, Americans, being inexperienced with foreign currencies, probably cannot get their heads around the idea you would get a higher interest rate, but depreciation would wipe out your gains (and more).
Consider the number of European countries (who ought to know better) where people borrowed in Euros or Swiss Francs, because mortgage rates were 5% vs. 10% in the Latvian Crown, Hungarian Forint, Icelandic whatever... then when the crisis hit, they were faced wiht a huge increase in payments and debts due.
But in the UK in the late 80s, some people took out swiss franc mortgages-- 6-7% rates v. 10%. When sterling fell out of the EMS (precursor to euro) in 1992 their payments and debts rose by over 20% overnight.
The economist Paul Krugman (amongst others) have built up a model of how financial crises happen based on exactly this model-- ie it is the borrowings by the private sector in foreign currencies that cause economic collapse when there is a run on the currency, the so-called 'real balance effect'.
There's no reason why Americans would say borrow their home mortgages in Euros or Japanese Yen, but you bet, if you could, that a bunch of them would  .
One does meet Americans who do not realize Canada has its own dollar-- until they see the funny coloured dollars . |
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CaptMidnight
Joined: 15 May 2007
Posts: 679
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| Posted: Mon Mar 15, 2010 7:03 am Post subject: Re: Why is EverBank only one offering CDs in foreign currenc |
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Everbank's foreign currency CDs are structured to make money when unsophisticated investors panic at a currency movement. They do this by including in the early withdrawal penalty the cost of a forced currency conversion, which was 1.5% at the time I checked with them a few years ago. I think you also lost all the interest. Since large currency swings are not uncommon this is a shrewd way to profit on the inexperience of investors. Everbank does not list these penalties on their website. You have to call them and ask.
_________________
The history of thought and culture is ... a changing pattern of great liberating ideas that inevitably turn in suffocating straightjackets...
--Isaiah Berlin |
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nisiprius
Joined: 26 Jul 2007
Posts: 9264
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Mon Mar 15, 2010 8:05 am Post subject: |
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When the dollar was strong, I never heard much about the importance of foreign investing of any kind. Now that it has been weakening for a decade, people have suddenly started to notice it, and foreign investing is all the rage.
Proverbially, currency risk is considered to be real and dangerous. It seems to me that every few years I read something in the paper about some bank losing hundreds of millions of dollars through currency speculation gone sour.
I almost think I'm hearing people saying "oh, sure, there's usually currency risk, but this time it's different, because I have a perfect crystal ball and the direction of future U. S. currency movement is a sure thing." | In 'The Only Investment Guide You'll Ever Need,' Andrew Tobias wrote: | The book explains how by converting your dollars to pesos you can earn 12% on your savings in Mexico instead of 5-1/2% here.... the author reassures, the peso is one of the stablest currencies in the world, having been pegged at a fixed rate to the dollar for 21 years, and the Mexican government has repeatedly stated its intention not to devalue. Now who the heck are you, who needed to buy a book to tell you about this in the first place, supposed to evaluate the stability of the Mexican peso? So, scared of the stock market and impressed by the author's credentials, you take el plunge.
And for 18 months you are getting all the girls. Because while others are pointing lamely to the free clock radios they are getting with their new 5-1/2% savings accounts, you are talking Mexican pesos at 12%.
Comes September, and Mexico announces that its peso is no longer fixed at the rate of 12.5 to the dollar, but will be allowed to "float." Overnight it floats 25% lower, and in a matter of days it is down 40%. Whammo....
(Everything changes and nothing changes. That was 1976. In 1982 the peso was devaluted again—by 80%. In 1995, it dropped 55%. From mid-2002 to mid-2004, it edged down 20%.) |
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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honkeoki
Joined: 12 Feb 2009
Posts: 150
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| Posted: Mon Mar 15, 2010 11:12 pm Post subject: |
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| nisiprius wrote: | | When the dollar was strong, I never heard much about the importance of foreign investing of any kind. Now that it has been weakening for a decade, people have suddenly started to notice it, and foreign investing is all the rage. |
Is this just another way of saying risk and reward are inextricably intertwined? And that, say, the Everbank 6-mo. South African rand-denominated CD yielding 5% APY is 5 times riskier than the Penfed 6-mo. CD yielding 1% APY?
And if the financial calculus isn't quite that simple can I use that shorthand in my personal financial planning? Because I have to admit that a 5% 6-mo. CD makes my mouth water and the only thing holding me back is William Bernstein reminding me that risk = reward. |
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Valuethinker
Joined: 11 May 2007
Posts: 12890
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| Posted: Tue Mar 16, 2010 4:53 am Post subject: |
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| honkeoki wrote: | | nisiprius wrote: | | When the dollar was strong, I never heard much about the importance of foreign investing of any kind. Now that it has been weakening for a decade, people have suddenly started to notice it, and foreign investing is all the rage. |
Is this just another way of saying risk and reward are inextricably intertwined? And that, say, the Everbank 6-mo. South African rand-denominated CD yielding 5% APY is 5 times riskier than the Penfed 6-mo. CD yielding 1% APY?
And if the financial calculus isn't quite that simple can I use that shorthand in my personal financial planning? Because I have to admit that a 5% 6-mo. CD makes my mouth water and the only thing holding me back is William Bernstein reminding me that risk = reward. |
Against the dollar the Rand has gone from something like 14 down to 7 and back up?
All you need to do is pull down a Rand in dollars chart for the last 10 years.
Highly volatile currencies don't make good places to put your savings.
Even dollar Euro is pretty frightening. |
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Febreze
Joined: 06 Mar 2010
Posts: 143
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| Posted: Tue Mar 16, 2010 10:00 am Post subject: Re: Why is EverBank only one offering CDs in foreign currenc |
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| LeoNYC wrote: | Title: "Why is EverBank only one offering CDs in foreign currency?"
Clearly, millions of people in the US would love to be able to invest in a CD denominated in a foreign currency. |
I would suggest that in a mostly free banking market, if EverBank is the only one offering CDs in a foreign currency, then clearly millions of people in the US would not love to be able to invest in that.
If there really were millions of people waiting with cash in fist, then the marketing departments of multi billion dollar banks would likely be entering this market. |
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stlrick
Joined: 14 Apr 2008
Posts: 108
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| Posted: Tue Mar 16, 2010 11:40 am Post subject: |
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What about investing in Euro CDs for the specific purpose of accumulating funds for European vacations? Might this be a good way to dollar-cost-average the Euro-Dollar exchange rate for European travel over the next 5-10 years?
Rick |
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LeoNYC
Joined: 14 Mar 2010
Posts: 2
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| Posted: Tue Mar 16, 2010 11:58 am Post subject: Re: Why is EverBank only one offering CDs in foreign currenc |
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| Febreze wrote: | I would suggest that in a mostly free banking market, if EverBank is the only one offering CDs in a foreign currency, then clearly millions of people in the US would not love to be able to invest in that.
If there really were millions of people waiting with cash in fist, then the marketing departments of multi billion dollar banks would likely be entering this market. |
Yes, unless there were some legal/regulatory complications in offering an FDIC insured savings and CD accounts in the non-US currencies. That's what I suspected. EverBank is clearly doing very well with these non-US denominated CDs. You can see hundreds of online discussions where people ask about it, and EverBank is making pretty good money because of it. I feel that there are enough people in the 300+ million US to support another bank or two offering this kind of service. |
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nisiprius
Joined: 26 Jul 2007
Posts: 9264
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Tue Mar 16, 2010 12:19 pm Post subject: |
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| stlrick wrote: | What about investing in Euro CDs for the specific purpose of accumulating funds for European vacations? Might this be a good way to dollar-cost-average the Euro-Dollar exchange rate for European travel over the next 5-10 years?
Rick |
I think that makes good sense.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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