Brokered CDs from Vanguard.

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barbhart1
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Brokered CDs from Vanguard.

Post by barbhart1 »

I have several brokered CDs from Vanguard that I bought 2 to 3 years ago and several are paying over 2.50%. As of today that portion of my portfolio has increased in value substantially. Of course you would have to cash them out. And there lies my question. Some of these go out 10 years (not all). If one of these matures in the near future (end of the year) do you get the interest and what you put in? Is the rising rate of these CDs because of the low interest rates going on now? Please explain, someone who knows about brokered CDs. My plan is to let things run but one of these $100,000 CDs has increased $20,000. Thoughts, anyone, Bueller?
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Cyclesafe
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Re: Brokered CDs from Vanguard.

Post by Cyclesafe »

If you bought a 2.5% coupon brokered CD at par (at 100) it pays $2.50 a year in interest and has increased in value as market interest rates have declined. IOW's if you sell it now you will book a gain.

If you bought the same bond at 95, you still get the $2.50 interest, but when it matures you'll get $100 which includes a $5 capital gain.

Somewhere in this is the answer to your question (I think).
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

barbhart1 wrote: Wed Sep 02, 2020 6:22 pm I have several brokered CDs from Vanguard that I bought 2 to 3 years ago and several are paying over 2.50%. As of today that portion of my portfolio has increased in value substantially. Of course you would have to cash them out. And there lies my question. Some of these go out 10 years (not all). If one of these matures in the near future (end of the year) do you get the interest and what you put in? Is the rising rate of these CDs because of the low interest rates going on now? Please explain, someone who knows about brokered CDs. My plan is to let things run but one of these $100,000 CDs has increased $20,000. Thoughts, anyone, Bueller?
Whether to sell now (and reinvest the proceeds) depends on the current price of the CD's. Can you please provide more specifics on the $100K CD you refer to above - when bought, term, current price if sold now, etc...).

It may well be that given current brokered CD rates (which are incredibly low), you'd be better off selling the CD and taking the $20,000 in profit (which I think would be capital gains and not interest income) and reinvesting the $120K in a new CD - not a brokered CD, but a traditional bank or CU CD where yields are not great, but are way better than brokered CD's.

Please provide the details requested and I can give you a more specific answer.
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IowaFarmBoy
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Re: Brokered CDs from Vanguard.

Post by IowaFarmBoy »

Not trying to hijack this thread but I have a related question that is likely part of the answer. I have a pretty good quantity of brokered cds at both Vanguard and Fidelity that they report to be worth quite a bit more than I purchased them for due to the rate drops. I've always just viewed these as something I plan to hold till maturity but lately I've wondered about selling these and moving to an alternative. I haven't dug into it seriously because I've always heard the market for these isn't very liquid and I've wondered what kind of haircut I will take if I sell.

I'm looking for any thoughts or comments about how the pricing on re-selling works. I know both firms provide some kind of estimate of market value but it seems to be higher than I see actual bids for.
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barbhart1
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Re: Brokered CDs from Vanguard.

Post by barbhart1 »

Okay, thanks for replies.

Here is three examples of my brokered cd portofolio

100,000 at 2.80%
Bought 2/14/18
Maturity 2/14/25
Discover bank now at $110,000

70,000 at 2.75%
Bought 6/26/19
Maturity 6/26/29
Discover Bank now at $82,200

100,000 at 2.95%
bought 5/22/19
maturity 5/22/29
Goldman Sachs at $119,200

With the total of my other CDs the gain (if that is what it is) represents $65,000 total if they are sold.

I'm 71. I'm looking for safety. About 25% in stocks in rest of portfolio.

I don't necessarily want to sell but it is tempting and is there a market. I don't really understand this at all.

Another question when time comes for RMDs , in my case 72, is the cap gains or interest added and I take RMD off that even if I don't selll?
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barbhart1
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Re: Brokered CDs from Vanguard.

Post by barbhart1 »

IowaFarmBoy wrote: Thu Sep 03, 2020 9:42 am Not trying to hijack this thread but I have a related question that is likely part of the answer. I have a pretty good quantity of brokered cds at both Vanguard and Fidelity that they report to be worth quite a bit more than I purchased them for due to the rate drops. I've always just viewed these as something I plan to hold till maturity but lately I've wondered about selling these and moving to an alternative. I haven't dug into it seriously because I've always heard the market for these isn't very liquid and I've wondered what kind of haircut I will take if I sell.

I'm looking for any thoughts or comments about how the pricing on re-selling works. I know both firms provide some kind of estimate of market value but it seems to be higher than I see actual bids for.
What would the alternative be? I don't understand how this all works. Your thoughts?
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Re: Brokered CDs from Vanguard.

Post by hudson »

barbhart1 wrote: Thu Sep 03, 2020 11:30 am Okay, thanks for replies.

Here is three examples of my brokered cd portofolio

100,000 at 2.80%
Bought 2/14/18
Maturity 2/14/25
Discover bank now at $110,000

70,000 at 2.75%
Bought 6/26/19
Maturity 6/26/29
Discover Bank now at $82,200

100,000 at 2.95%
bought 5/22/19
maturity 5/22/29
Goldman Sachs at $119,200

With the total of my other CDs the gain (if that is what it is) represents $65,000 total if they are sold.

I'm 71. I'm looking for safety. About 25% in stocks in rest of portfolio.

I don't necessarily want to sell but it is tempting and is there a market. I don't really understand this at all.

Another question when time comes for RMDs , in my case 72, is the cap gains or interest added and I take RMD off that even if I don't selll?
barbhart1,

If I didn't need the money, I would not sell. Those are great rates. You're going to get roughly that amount between now and maturity. Also, if you sell, you'll have a capital gain. I agree that those values look tempting. I'm not a great expert on selling brokered CDs. I've heard that you call your broker and ask them to get some bids; then you can decide if you want to sell.
Bottom Line: If those were my CDs, I'd hold 'em. Capital gains give me heartburn. I can handle paying taxes on the interest.
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Re: Brokered CDs from Vanguard.

Post by investor.saver1 »

I've bought and sold CDs at Schwab and VG. To sell the CD (you're selling, not cashing it in), you must contact the brokerage and request a bid for the CD. The brokerage (VG, Schwab, Fidelity) will then solicit bids for your CD from outside the brokerage (or maybe inside). The brokerage house will then call you back after an hour or so and tell you what the bid is for the CD you are wanting to sell. At that point, you take the bid or you reject the bid. You most probably will receive a bid for less than the market price that is being reported on your brokerage statement. If you receive more than you paid for the CD, then you will have a gain. If you receive less, then a loss. Assuming you accept the bid price, your account will be credited with agreed to bid price and accrued interest thru the sale date. Also, I would expect to pay a small trade fee (maybe).

Brokered CD's are simply another flavor of bonds. You can think of it like that. They buy and sell on the secondary market all the time. FYI, I generally buy CDs on the secondary market because they typically pay a higher interest rate than newly issued CDs.

With regard to selling and reinvesting. I would not anticipate you will come out ahead playing that game.
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MikeG62
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

barbhart1 wrote: Thu Sep 03, 2020 11:30 am Okay, thanks for replies.

Here is three examples of my brokered cd portofolio

100,000 at 2.80%
Bought 2/14/18
Maturity 2/14/25
Discover bank now at $110,000

70,000 at 2.75%
Bought 6/26/19
Maturity 6/26/29
Discover Bank now at $82,200

100,000 at 2.95%
bought 5/22/19
maturity 5/22/29
Goldman Sachs at $119,200

With the total of my other CDs the gain (if that is what it is) represents $65,000 total if they are sold.

I'm 71. I'm looking for safety. About 25% in stocks in rest of portfolio.

I don't necessarily want to sell but it is tempting and is there a market. I don't really understand this at all.

Another question when time comes for RMDs , in my case 72, is the cap gains or interest added and I take RMD off that even if I don't selll?
OK, let me take a crack at the Goldman CD (analysis would be similar for the others).

You are earning interest of $2,950 per year (or $246 per month) through May of 2029. There is 8 years and 8 months or 104 months remaining until maturity. That means if you hold this CD to maturity you'll receive $25,584 in interest (104 x $246) between now and May of 2029 plus your $100,000 in principal back. Total cash flow between now and maturity is $125,584. [For simplicity, I am ignoring the compounding of interest on the interest (assuming the interest is being reinvested in the CD in the first place).]

If on the other hand, you can sell the bond now for $119,200 (assuming you can), you would be realizing $19,200 of the $25,584 in future interest immediately. That is 75% of the future interest and at possibly more favorable tax rates (as you'd change the characterization of the future income from interest (taxed as ordinary income at your marginal tax rate) to capital gains. Setting aside the tax upside, you'd only need to find a home for that $119,200 which earns $6,384 in total interest over the next 104 months (or $61.40 per month) to break even. That translates to an annualized yield of 0.3%. Do you think you can do better than 0.3%? I sure think you can.

Assume you reinvest the $119,200 in proceeds in a 5-year CD (at 1.5% per year) and when that matures (in Sept 2025) a 3-year CD at 1.0% and when that matures (Sept 2028) stick the proceeds in an online savings account (at 0.5%) until May of 2029 (just to get out to the same date as when the Goldman CD's matures). How would that work out?

You'd earn $1,788 per year in interest over the next 5 years ($119,200 x 1.5%). At that time you'd have $119,200 + $8,940 in interest ($1,788 x 5) or $128,140 to invest in a 3-year CD at an assumed rate of 1.0%. You are already ahead of where you'd be had you held onto the Goldman CD till maturity.

The new 3-year CD would generate $1,281 per year in interest ($128,140 x 1.0%) bringing the grand total to $131,983 ($128,140 + $3,843 in interest) at maturity of the 3-year CD (Sept 2028). Assume you then invest the proceeds in an online savings account for the next 8 months earning 0.5% annualized (or an additional $440). In May of 2029 you'd have $132,423 ($131,983 + $440).

Which would you rather have? $125,584 at maturity of the existing CD in May 2029 or $132,423 at maturity in the string of new CD's plus the online savings account for 8 months?

As I said, this all assumes you can actually sell the Goldman CD for $119,200 or something close to $119,200.

Two weeks ago I invested in a 5-year CD ladder (at a credit union) at a yield of ~2.0% (in fact the 5-year tranche of that ladder is yielding 2.10%). Why do I bring this up? I think it shows that I've been pretty conservative in my assumptions above (assuming you only get 1.50% in the 5-year CD).

Does that make sense? Is this helpful?
Last edited by MikeG62 on Thu Sep 03, 2020 1:27 pm, edited 2 times in total.
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increment
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Re: Brokered CDs from Vanguard.

Post by increment »

MikeG62 wrote: Thu Sep 03, 2020 12:29 pm For simplicity, I am ignoring the compounding of interest on the interest (assuming the interest is being reinvested in the CD in the first place
I believe that for brokered CDs it is not possible to reinvest interest payments back into the (same) CD anyway.
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

increment wrote: Thu Sep 03, 2020 12:37 pm
MikeG62 wrote: Thu Sep 03, 2020 12:29 pm For simplicity, I am ignoring the compounding of interest on the interest (assuming the interest is being reinvested in the CD in the first place
I believe that for brokered CDs it is not possible to reinvest interest payments back into the (same) CD anyway.
Ok good to know. Thanks for clarifying that. Makes the math a bit easier.

I think the OP’s issue is going to be how marketable these CD’s are. I have no experience with them. I would ask my broker to get me some bids. If close to the values he is seeing I would sell them and move the proceeds into CD’s. It’s a no brainer.
Last edited by MikeG62 on Mon Sep 14, 2020 2:20 pm, edited 1 time in total.
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Re: Brokered CDs from Vanguard.

Post by sycamore »

barbhart1 wrote: Thu Sep 03, 2020 11:30 am ...Another question when time comes for RMDs , in my case 72, is the cap gains or interest added and I take RMD off that even if I don't selll?
barbhart1,
I'm no expert on this, but the above statement is a bit confusing. Could you clarify if the CDs are in your Traditional IRA?

If yes, the concept of capital gains doesn't really matter. Every dollar you withdraw from your Trad IRA is counted as income; it doesn't matter if your IRA balance grews from capital gains, share price gains, or dividends/interest. Also, the RMD is based on your IRA account balance at the end of the year. See the Boglehead wiki article on RMDs for details.

But if your CDs are in a taxable account, you would distinguish between capital gains (if you sell now) and interest income when you file your yearly tax return. RMDs do not apply to taxable accounts.
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Re: Brokered CDs from Vanguard.

Post by IowaFarmBoy »

barbhart1 wrote: Thu Sep 03, 2020 11:33 am
IowaFarmBoy wrote: Thu Sep 03, 2020 9:42 am I've always just viewed these as something I plan to hold till maturity but lately I've wondered about selling these and moving to an alternative.
What would the alternative be? I don't understand how this all works. Your thoughts?
Re alternatives:
  • I hold some of these in a taxable account and could move the money to my credit union which is paying about 1.5% right now. I probably should have done this long ago.
  • I hold some in a traditional IRA at Fidelity and might consider moving the money to a MYGA (multi-year guaranteed annuity- there have been some threads on these recently). I can probably get 1.1% on the MYGA. My feelings are mixed about this- I give up a lot of liquidity and the FDIC guarantee in exchange for the slightly higher rate.
  • I hold some in a Roth IRA at Vanguard and don't really have good alternatives that would pay a higher rate.
If I can sell these at a price fairly close to where they are valued, it makes sense to move for the higher rate (especially the taxable to credit union move). If there is too much of a spread in the price, I will probably just stay put.
Last edited by IowaFarmBoy on Thu Sep 03, 2020 2:31 pm, edited 1 time in total.
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Re: Brokered CDs from Vanguard.

Post by barbhart1 »

Thanks, y'all. This really helps and I think I understand now. All my portfolio save about $60,000 is in traditional IRA that I won't tap until RMD when I'm 72. I turn 71 next month. I like the idea of selling and then reinvesting for higher gain but don't feel the need to do that. Think I will leave it alone. Not sure about the callable aspect of these CDs either. But the rates are really good and all at Vanguard. Of course the market is down 3% as we speak......it's always something.
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Re: Brokered CDs from Vanguard.

Post by Scooter57 »

Vanguard will charge more than s small fee to sell your CD. It would be $250 for large ones. And you are unlikely to get the price shown on the site as those are mechanically marked to market based on current rates, not sales of those particular CDs.
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Re: Brokered CDs from Vanguard.

Post by Kevin M »

The prices of your brokered CDs have risen a lot because CD yields have fallen a lot, as would be the case for any bond. For example, a CD you bought at 2.8% yield now has a yield of say 0.5%. Someone will pay a lot more for the 2.8% interest payments than for a new CD offering 0.5% interest payments (I see new issue 5-year CD at Vanguard at 0.45%).

You can use the spreadsheet PV or PRICE functions to see what the price is for different coupon rates and yields. For example, at a yield 0.5% with an interest rate of 2.8% for a 5-year CD:

Code: Select all

-PV(0.5%,5,2.8%,1)*100
returns a price of 111.33. This is a percent of face value, so it would be $111,330 for $100,000 of face value.

Or we could look at one of your CDs and calculate the yield. With a price of 110 and rate of 2.8%, maturing 2/14/2025:

Code: Select all

=YIELD("9/4/2020", "2/14/2025",2.8%,110,100,1)
which returns 0.52%, and just confirms what I said in the first paragraph.

As others have said, you probably can get closer to 1.5% by buying a 5-year CD directly from a bank or credit union (direct CD). However, to get that yield, you're probably going to have to join a credit union, unless you're lucky enough to already be a member of a credit union that's offering high CD rates.

If the brokered CD is in an IRA, you can still buy directly from a bank or credit union by doing an IRA transfer from your broker to the bank or credit union. However, this can take a few weeks, and the bank/CU may or may not agree to lock the rate for you once they get your transfer paperwork.

You may be able to sell directly online if there is a bid for your CD. You can at least look online to see if there's a bid, and if not, you can look at bid/ask prices for similar CDs to get an idea of the bid/ask spreads. Let's look at yours at Vanguard.
barbhart1 wrote: Thu Sep 03, 2020 11:30 am 100,000 at 2.80%
Bought 2/14/18
Maturity 2/14/25
Discover bank now at $110,000
Here's what I see for this CD and similar maturities:

Image

Yours is in the middle, and although there are no bids for it, there are bids for many others of similar maturity. Looking at the one right above it, you would pay $108,994 to buy 100 (except there are not 100 available), and you would receive $108,375 to sell 100. Vanguard used to charge a commission to buy or sell CDs on the secondary market, but looking now, I see that they no longer charge to sell CDs before maturity.
barbhart1 wrote: Thu Sep 03, 2020 11:30 am 70,000 at 2.75%
Bought 6/26/19
Maturity 6/26/29
Discover Bank now at $82,200

100,000 at 2.95%
bought 5/22/19
maturity 5/22/29
Goldman Sachs at $119,200
Image

I don't see yours, but ones of similar maturity have crazy bid/ask spreads, with quite a range, so might pay a lot in bid/ask spread to sell these. I guess the market for these longer maturities is less liquid. Also, you're not going to get much more for a 10-year direct CD than for a 5-year direct CD--maybe even less--so the opportunity to do better might not be as good for these.

At any rate, I think I would compare the bid (sell) yield to alternatives, and if you can't do enough better to justify the time and effort, just hold.
barbhart1 wrote: Thu Sep 03, 2020 11:30 am Another question when time comes for RMDs , in my case 72, is the cap gains or interest added and I take RMD off that even if I don't selll?
Yes, your RMD is based on the value of your IRA accounts as of Dec 31 of the previous year, so that will include whatever CD values are shown on your December statement, and of course the interest the CDs have paid out into whatever you put it in in your IRA.

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Re: Brokered CDs from Vanguard.

Post by Kevin M »

Scooter57 wrote: Thu Sep 03, 2020 4:34 pm Vanguard will charge more than a small fee to sell your CD. It would be $250 for large ones.
Apparently no longer the case:

Image
Source: https://investor.vanguard.com/investing ... /cds-bonds

See the line at the bottom of the screenshot.
Scooter57 wrote: Thu Sep 03, 2020 4:34 pm And you are unlikely to get the price shown on the site as those are mechanically marked to market based on current rates, not sales of those particular CDs.
Right, but you can look at quotes for similar CDs to get an idea of the bid/ask spreads, as I showed above.

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Re: Brokered CDs from Vanguard.

Post by Scooter57 »

That is confusing. Why do they list the $1/thousand fee up top for selling on the secondary market.
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Re: Brokered CDs from Vanguard.

Post by Kevin M »

Scooter57 wrote: Thu Sep 03, 2020 5:05 pm That is confusing. Why do they list the $1/thousand fee up top for selling on the secondary market.
They don't specify that it applies to selling. I think the idea is that in general the commission applies to buying or selling "CDs, U.S. government agency securities, and corporate bonds", and the note at the bottom is a single exception to that.

This is relatively new. There also used to be two tiers of commissions, with Flagship and above paying $1, and lower tiers paying $2. Now everyone pays the same.

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Re: Brokered CDs from Vanguard.

Post by Scooter57 »

I wonder if they are buying up high yield CDs for some reason and thus encouraging their sales.
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Re: Brokered CDs from Vanguard.

Post by barbhart1 »

Thanks again so much. Bogles to the rescue.

Barbara
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Re: Brokered CDs from Vanguard.

Post by Mitchell777 »

Never sold a CD. How does this work? If I have $70K of this particular brokerage CD, does this mean it would probably sell for at least $71,287 ($70K * 1.01839)? I know I'd only come out a little ahead by maturity. Thanks

Qty. bid/ask Min. qty. bid/ask CUSIP Issue Maturity Price bid/ask Yield to worst bid ask Yield to maturity bid ask
Coupon
250/25 5/1 254673QU3 Discover Bk Conditional Puts - Death Of Holder, FDIC#5649 06/28/2021 3.000 101.839/102.194 0.633/0.187 0.633/0.187
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Re: Brokered CDs from Vanguard.

Post by Mitchell777 »

Mitchell777 wrote: Mon Sep 14, 2020 1:47 pm Never sold a CD. How does this work? If I have $70K of this particular brokerage CD, does this mean it would probably sell for at least $71,287 ($70K * 1.01839)? I know I'd only come out a little ahead by maturity. Thanks

Qty. bid/ask Min. qty. bid/ask CUSIP Issue Maturity Price bid/ask Yield to worst bid ask Yield to maturity bid ask
Coupon
250/25 5/1 254673QU3 Discover Bk Conditional Puts - Death Of Holder, FDIC#5649 06/28/2021 3.000 101.839/102.194 0.633/0.187 0.633/0.187
Just want to bump this up hoping someone, maybe Kevin M, knows the answer. Thanks
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

Mitchell777 wrote: Tue Sep 15, 2020 7:31 pm
Mitchell777 wrote: Mon Sep 14, 2020 1:47 pm Never sold a CD. How does this work? If I have $70K of this particular brokerage CD, does this mean it would probably sell for at least $71,287 ($70K * 1.01839)? I know I'd only come out a little ahead by maturity. Thanks

Qty. bid/ask Min. qty. bid/ask CUSIP Issue Maturity Price bid/ask Yield to worst bid ask Yield to maturity bid ask
Coupon
250/25 5/1 254673QU3 Discover Bk Conditional Puts - Death Of Holder, FDIC#5649 06/28/2021 3.000 101.839/102.194 0.633/0.187 0.633/0.187
Just want to bump this up hoping someone, maybe Kevin M, knows the answer. Thanks
Although I've never sold a brokered CD early, I think you should reach out to your broker and see if they can get you a bid for the CD. Don't assume the 1.01839 is the price you will get. These things aren't traded all that frequently so the price you are seeing could be stale. Call and ask your broker.

Looks like it matures in 9 months and 14 days (from Sept 14th - date of your post) - if I have this right it's 287 days. Hold till then and you'd earn an additional $1,651 ($70,000 x 3.0% x (287/365)) in taxable interest (taxed at your marginal tax rate). If you can get $1.01839 today, you'd harvest $1,287 of the $1,651 (and at capital gains tax rates and not ordinary income tax rates). You'd then have $71,287 to reinvest for 9 months. Assuming you can get 0.75% over the next 9-months, you'd earn $401 on the $71,287. This would bring the total at or around 6/30/21 to $71,687. Honestly looks like a push to me. The tax arbitrage on the LTCG rate (over your marginal tax rate) may be where the real upside is. Depends on your marginal tax rate.
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Re: Brokered CDs from Vanguard.

Post by Kevin M »

MikeG62 wrote: Wed Sep 16, 2020 9:01 am
Mitchell777 wrote: Tue Sep 15, 2020 7:31 pm
Mitchell777 wrote: Mon Sep 14, 2020 1:47 pm Never sold a CD. How does this work? If I have $70K of this particular brokerage CD, does this mean it would probably sell for at least $71,287 ($70K * 1.01839)? I know I'd only come out a little ahead by maturity. Thanks

Qty. bid/ask Min. qty. bid/ask CUSIP Issue Maturity Price bid/ask Yield to worst bid ask Yield to maturity bid ask
Coupon
250/25 5/1 254673QU3 Discover Bk Conditional Puts - Death Of Holder, FDIC#5649 06/28/2021 3.000 101.839/102.194 0.633/0.187 0.633/0.187
Just want to bump this up hoping someone, maybe Kevin M, knows the answer. Thanks
Although I've never sold a brokered CD early, I think you should reach out to your broker and see if they can get you a bid for the CD. Don't assume the 1.01839 is the price you will get. These things aren't traded all that frequently so the price you are seeing could be stale. Call and ask your broker.
Not sure, but I think if you're seeing a bid, and you can click "Sell" and see the same bid price in the sell screen, you should get the bid price when you sell. Or, you could place the order, and it won't get filled.

Of course you can do as Mike recommends and request additional bids.

However, although market is closed, the bid I now see is 101.185, so lower than when you looked. At any rate, your math looks correct to me.
MikeG62 wrote: Wed Sep 16, 2020 9:01 amLooks like it matures in 9 months and 14 days (from Sept 14th - date of your post) - if I have this right it's 287 days. Hold till then and you'd earn an additional $1,651 ($70,000 x 3.0% x (287/365)) in taxable interest (taxed at your marginal tax rate). If you can get $1.01839 today, you'd harvest $1,287 of the $1,651 (and at capital gains tax rates and not ordinary income tax rates). You'd then have $71,287 to reinvest for 9 months. Assuming you can get 0.75% over the next 9-months, you'd earn $401 on the $71,287. This would bring the total at or around 6/30/21 to $71,687. Honestly looks like a push to me. The tax arbitrage on the LTCG rate (over your marginal tax rate) may be where the real upside is. Depends on your marginal tax rate.
Another way to look at it is that the bid yield I'm seeing is 1.454%, so other than tax arbitrage, that's the yield you'd need to beat on an alternative investment over a period equal to the remaining term to maturity. That may be difficult.

Kevin
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Re: Brokered CDs from Vanguard.

Post by Mitchell777 »

Thanks Mike and Kevin. Normally I would not look at this sort of sell but at today's interest rates every little bit helps. My marginal tax rate will be 22 or 24% so when I can exchange that for 15% CG rate it is a little edge. But at the numbers Kevin notes it does not look good.
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

Mitchell777 wrote: Wed Sep 16, 2020 5:00 pm Thanks Mike and Kevin. Normally I would not look at this sort of sell but at today's interest rates every little bit helps. My marginal tax rate will be 22 or 24% so when I can exchange that for 15% CG rate it is a little edge. But at the numbers Kevin notes it does not look good.
Interestingly, I see two different bids - one at 1.01839 (YTM of 0.592%) and one at 1.01187 (YTM of 1.44%). The one at 1.01187 doesn't make a lot of sense given current market interest rates for a CD (or bank deposit) with a term of ~9 months. This is why I'd call Vanguard and find out exactly what they can get you for the security. Even at the 1.01839 it's more a less a push with the tax rate arb being the bulk of the benefit.

When I see stuff like this with brokered CD's it reinforces my view that I'd rather not invest in them. Illiquid market and for the last year or so substandard yields to bank or CU direct issue CD's.
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Re: Brokered CDs from Vanguard.

Post by Mitchell777 »

I did call Vanguard Brokerage and rec'd a bid at the high range that I saw on the screen. Thanks for that suggestion. It was a learning experience for me. I sold a different CD than discussed above. I came out a few hundred dollars ahead as long as i invest the money at min 0.7%. I also exchanged some of the gain from ordinary income to CG. But, I did some tax loss harvesting earlier in the year and would have preferred to use that against ordinary income as much as possible so that sort of wipes out that gain.

Transaction details
Quantity 80
Transaction type Sell
Price 102.322
Yield to worst 0.244
Yield to maturity 0.244
Trade date / time 09/17/2020
Status Executed


Face value $80,000
Principal $81,857.60
Accrued interest $381.37
Accrued no. of days 58
Commission $0
Net amount $82,238.97


Product description

Product type Certificate of deposit
Coupon 3.000
Maturity 07/26/2021
MikeG62
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

Mitchell777 wrote: Thu Sep 17, 2020 1:47 pm I did call Vanguard Brokerage and rec'd a bid at the high range that I saw on the screen. Thanks for that suggestion. It was a learning experience for me. I sold a different CD than discussed above. I came out a few hundred dollars ahead as long as i invest the money at min 0.7%. I also exchanged some of the gain from ordinary income to CG. But, I did some tax loss harvesting earlier in the year and would have preferred to use that against ordinary income as much as possible so that sort of wipes out that gain.

Transaction details
Quantity 80
Transaction type Sell
Price 102.322
Yield to worst 0.244
Yield to maturity 0.244
Trade date / time 09/17/2020
Status Executed


Face value $80,000
Principal $81,857.60
Accrued interest $381.37
Accrued no. of days 58
Commission $0
Net amount $82,238.97


Product description

Product type Certificate of deposit
Coupon 3.000
Maturity 07/26/2021
Check Marcus Bank AARP no-penalty CD for 0.85% yield on 8 month CD. If not an AARP member, you can join for $12.

Another option is Barksdale Federal Credit Union. Their traditional CD's are among the most competitive out there. I got in as my Dad was honorably discharged from the military (60 years ago). So getting in might be easier than you think.
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Kevin M
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Re: Brokered CDs from Vanguard.

Post by Kevin M »

Mitchell777 wrote: Thu Sep 17, 2020 1:47 pm <snip>
I came out a few hundred dollars ahead as long as i invest the money at min 0.7%.<snip>
You got a great price.

My intuition was that as long as you earn more than the bid yield (on an annualized basis), you come out ahead, even ignoring any tax arbitrage. I calculated it a couple of different ways, and come up with 0.23% as the breakeven yield, which is a bit less than the bid yield of 0.24%, so my intuition was in the ballpark.

I'm actually surprised you got such a good price, given that new-issue 10-12m CDs at Vanguard are offering only 0.15%.

Even an Ally 11-month no-penalty CD yields 0.75%, and it's usually easy to open an Ally account if you don't already have one.

Kevin
Mitchell777 wrote: Thu Sep 17, 2020 1:47 pm Transaction details
Quantity 80
Transaction type Sell
Price 102.322
Yield to worst 0.244
Yield to maturity 0.244
Trade date / time 09/17/2020
Status Executed


Face value $80,000
Principal $81,857.60
Accrued interest $381.37
Accrued no. of days 58
Commission $0
Net amount $82,238.97


Product description

Product type Certificate of deposit
Coupon 3.000
Maturity 07/26/2021
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Re: Brokered CDs from Vanguard.

Post by Kevin M »

When I did a generic CD search at Vanguard today when the market was open, all of the Sell buttons were inactive. However, when I clicked Sell next to a couple of CDs I own, I saw bid quotes and the Sell button was active.

What I saw for bid quotes was in line with what I've seen historically, which is a wide range of bid/ask spreads. The bid for one of my CDs was at a small premium, but the bid for another one was something like 95.xx, and both CDs are similar in terms of coupon and maturity.

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Re: Brokered CDs from Vanguard.

Post by hudson »

With those 3+% brokered CDs it's tempting to sell them.
For me, it's more tempting to hold em and take the monthly income for a few more years.
Capital gains give me heartburn.
The rule of thumb was if you buy brokered CDs, you should hold them until maturity.
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Re: Brokered CDs from Vanguard.

Post by Kevin M »

hudson wrote: Thu Sep 17, 2020 5:51 pm With those 3+% brokered CDs it's tempting to sell them.
The yield is not 3% if the price is > 100 with a 3% coupon. We just saw someone get a price of >102, with a yield of about 0.24% with a 3% coupon.
For me, it's more tempting to hold em and take the monthly income for a few more years.
But we just saw that if you can reinvest the proceeds at a yield that's higher than the bid yield, you actually earn more than by holding the CD.
Capital gains give me heartburn.
If your marginal federal ordinary income tax rate is greater than your marginal federal capital gains tax rate, you end up with more in your pocket by converting what would be ordinary income to capital gains.
The rule of thumb was if you buy brokered CDs, you should hold them until maturity.
That's because of typically high bid/ask spreads, but if you can get a good enough bid price, the rule of thumb doesn't necessarily hold.

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Re: Brokered CDs from Vanguard.

Post by hudson »

Many thanks Kevin!
More capital gains might take me over one of those dreaded cliffs.
again...
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

hudson wrote: Thu Sep 17, 2020 6:07 pm Many thanks Kevin!
More capital gains might take me over one of those dreaded cliffs.
again...
As is typically the case, there is no one right answer that applies to everyone universally. Individual circumstances always come into play as you rightly point out.
Kevin M wrote: Thu Sep 17, 2020 5:29 pm
What I saw for bid quotes was in line with what I've seen historically, which is a wide range of bid/ask spreads. The bid for one of my CDs was at a small premium, but the bid for another one was something like 95.xx, and both CDs are similar in terms of coupon and maturity.

Kevin
This is what gives me great pause in investing in brokered CD's. Well that and the fact that current yields on brokered CD's are appallingly low (one can do much better buying CD's directly from some/many banks or CU's). It seems that folks buying brokered CD's in this environment are willing accepting lower yields for the simplicity of one stop shopping.
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Re: Brokered CDs from Vanguard.

Post by Kevin M »

MikeG62 wrote: Fri Sep 18, 2020 9:45 am
Kevin M wrote: Thu Sep 17, 2020 5:29 pm What I saw for bid quotes was in line with what I've seen historically, which is a wide range of bid/ask spreads. The bid for one of my CDs was at a small premium, but the bid for another one was something like 95.xx, and both CDs are similar in terms of coupon and maturity.

Kevin
This is what gives me great pause in investing in brokered CD's. Well that and the fact that current yields on brokered CD's are appallingly low (one can do much better buying CD's directly from some/many banks or CU's). It seems that folks buying brokered CD's in this environment are willing accepting lower yields for the simplicity of one stop shopping.
I had been buying only direct CDs since late 2010, but there was a period in Q1 2018 when brokered CDs offered competitive rates, and at the time it was more convenient to transfer proceeds from maturing direct CDs into brokered CDs at Vanguard and Fidelity, reducing the number of active accounts while earning comparable returns. As hudson mentioned, I bought these with the intention of holding to maturity, knowing that bid/ask spreads were high and variable.

This relatively brief period of competitive brokered CD yields was an exception to the typical case of direct CDs offering significantly higher yields, which is the environment we are in once again.

Back to selling brokered CDs, we saw from Mitchell's experience that you might be able to get a good enough price to warrant selling the CD and reinvesting in a higher-yielding direct CD. As I said, the price he got was exceptional in the current market, with a bid yield that's significantly lower (bid price higher) than the bid yields I see for comparable CDs.

I just checked another one of my brokered CDs at Vanguard, and the bid yield was in the 0.7% ballpark, so not only probably not worth selling, but also all of my brokered CDs are in IRA brokerages, and selling then doing an IRA transfer to a bank or CU takes time, potentially up to three weeks, and whatever deal might be available now might not be available three weeks from now. Also, I tended to buy small quantities, like 5 or 10, as small quantities tended to offer the best ask yields in the secondary market, and I'm obviously not going to mess around selling a CD to transfer $5K or $10K somewhere else.

One final note on selling. If there is no bid offered for your CD at Vanguard, you can click Sell to get a bid offer, so you don't even have to call. However, if there is a bid and you don't like it, you can't request other bids online as far as I can tell.

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Re: Brokered CDs from Vanguard.

Post by Mitchell777 »

Just to complete the discussion. Regarding the $70K CD (3% Matures 06/28/21) I discussed earlier, I sold that today at 102.088, yield to worst of .263. I can invest the proceeds locally at 0.9% for one year. I did not buy these brokerage CD's with the intent to sell early. I buy most of my CD's locally as I've been able to get good rates up until recently. But, at today's low interest rates if I can come out a few hundred dollars ahead selling early, it's something I need to consider.
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Re: Brokered CDs from Vanguard.

Post by depressed »

Scooter57 wrote: Thu Sep 03, 2020 8:34 pm I wonder if they are buying up high yield CDs for some reason and thus encouraging their sales.
I am a little confused. Who is buying up high yield CD and encouraging their sales? Does Vanguard Brokerage buy and hold CDs for themselves?
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Re: Brokered CDs from Vanguard.

Post by depressed »

Mitchell777 wrote: Fri Sep 18, 2020 3:25 pm Just to complete the discussion. Regarding the $70K CD (3% Matures 06/28/21) I discussed earlier, I sold that today at 102.088, yield to worst of .263. I can invest the proceeds locally at 0.9% for one year. I did not buy these brokerage CD's with the intent to sell early. I buy most of my CD's locally as I've been able to get good rates up until recently. But, at today's low interest rates if I can come out a few hundred dollars ahead selling early, it's something I need to consider.
Nicely done.
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

Mitchell777 wrote: Fri Sep 18, 2020 3:25 pm Just to complete the discussion. Regarding the $70K CD (3% Matures 06/28/21) I discussed earlier, I sold that today at 102.088, yield to worst of .263. I can invest the proceeds locally at 0.9% for one year. I did not buy these brokerage CD's with the intent to sell early. I buy most of my CD's locally as I've been able to get good rates up until recently. But, at today's low interest rates if I can come out a few hundred dollars ahead selling early, it's something I need to consider.
That is a no brainer. You got a great deal there.

I guess there are enough people opting for the simplicity route (who would rather just accept the meager yield on brokered CD's at Vanguard (or whatever broker they are using) than move funds to new banks or CU's in search of better yields elsewhere) to drive the the yield on these brokered CD's to be this low. Said another way, someone had to be on the other side of this trade. Who would want to purchase a 9 month CD at a yield to maturity of 0.26% in this market? I find it puzzling when there are 1.0% (or better) 12-month CD's available (or even no-penalty CD's with a yield at 3X the 0.26%). Was this IRA or taxable money?

Having said this, I do have a friend who has all of his financial assets at Vanguard. He complains about not being able to get yield on CD's. Yet when I alert him to reasonably attractive (in this market) CD deals I discover (which I have done a number of times - including the 3.25% and 3.0% PSECU 36-month and 24-month add-on CD's from back in the fall of 2019), he passes on them choosing instead to keep his money at Vanguard. Says he is not dealing with enough money to bother yield chasing (although he has enough money in CD's to fund his lifestyle for the next 25 years). An example of where simplicity trumps a desire to get higher yields I suppose.
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Re: Brokered CDs from Vanguard.

Post by MikeG62 »

Kevin M wrote: Fri Sep 18, 2020 2:54 pm
I had been buying only direct CDs since late 2010, but there was a period in Q1 2018 when brokered CDs offered competitive rates, and at the time it was more convenient to transfer proceeds from maturing direct CDs into brokered CDs at Vanguard and Fidelity, reducing the number of active accounts while earning comparable returns. As hudson mentioned, I bought these with the intention of holding to maturity, knowing that bid/ask spreads were high and variable.

This relatively brief period of competitive brokered CD yields was an exception to the typical case of direct CDs offering significantly higher yields, which is the environment we are in once again.
Not only did you (and others like you) take advantage of these higher yielding options at that time (I was too busy buying 6-month treasuries back then :oops: ), but you/they set yourself/themselves up for this opportunity now to liquidate those CD's at high prices and reinvest the proceeds elsewhere for better yields. To the extent that these are small lots and in IRA's probably makes cashing them out and moving the funds elsewhere not worth the bother (and risk rates potentially dropping during the process). However, not everyone is dealing in such small lots, such as the case with the OP of this thread.
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Re: Brokered CDs from Vanguard.

Post by hudson »

MikeG62 wrote: Fri Sep 18, 2020 9:45 am
hudson wrote: Thu Sep 17, 2020 6:07 pm Many thanks Kevin!
More capital gains might take me over one of those dreaded cliffs.
again...
As is typically the case, there is no one right answer that applies to everyone universally. Individual circumstances always come into play as you rightly point out.
I agree....one either has to do their homework the first time around or do it like I do and get it right the 2d time around.
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Re: Brokered CDs from Vanguard.

Post by Scooter57 »

depressed wrote: Fri Sep 18, 2020 6:12 pm
Scooter57 wrote: Thu Sep 03, 2020 8:34 pm I wonder if they are buying up high yield CDs for some reason and thus encouraging their sales.
I am a little confused. Who is buying up high yield CD and encouraging their sales? Does Vanguard Brokerage buy and hold CDs for themselves?
Vanguard:s brokerage makes a market for CDs so it is possible they buy them to sell to clients. Just a guess.
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