I was looking to buy a 10 year treasury through Vanguard but see the next auction is not until December... however there is brokered CD that is offering 5.3%:
So its a better return than the treasury and being a brokered CD is tradable just like the treasury bond if I have to sell before maturity.
Is FDIC insured (I am investing low ten-thousands so well within the 250K FDIC limit) so as safe as the Treasury.
I do have to pay state taxes here (treasury gains would be exempt), but is there any other downside to buying this?
Edit: adding note that I have never bought brokered CDs before, so far the only time we have done CDs is through a 'regular' online savings bank like Marcus.
The catch is that it is "callable". It means they can cancel the CD on you if they want and pay you back your deposit without paying any more interest. and they definitely will if rates drop very much. I don't think there is much likelihood of them paying on it for 10 years without calling it.
Please notice that it is callable after one year, so if rates go up you lose (tying up your money for 10 years) and if rates go down you lose (they call the CD).
If you are convinced that interest rates have stopped climbing and will begin to fall again, I would select the highest paying non-callable CD available.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Thank you all. I completely missed the implication of this CD being callable and what'll happen when rates drop.
I'll look for the highest non-callable option (or if next month Treasuries open up again, will probably just stick to buying those and keep my life simple)
carloslando wrote: ↑Thu Nov 10, 2022 11:29 am
Thank you all. I completely missed the implication of this CD being callable and what'll happen when rates drop.
I'll look for the highest non-callable option (or if next month Treasuries open up again, will probably just stick to buying those and keep my life simple)
Thank you!
Yeah, I periodically look at brokered CDs and never find them compelling compared to bank CDs, like the 4.99% available now from KS State Bank. If rates go down, you continue to get your 4.99%. If rates go up substantially, you have the option to bail out (with a penalty of 18 months interest for CD terms of 5+ years). So all of the optionality is on your side, instead of the bank's side.
carloslando wrote: ↑Thu Nov 10, 2022 11:29 am
Thank you all. I completely missed the implication of this CD being callable and what'll happen when rates drop.
I'll look for the highest non-callable option (or if next month Treasuries open up again, will probably just stick to buying those and keep my life simple)
Thank you!
You can buy on the secondary Treasury market, too. A 30 year bond with 10 years left is going to be priced similarly to a new 10 year. (Sometimes a bit better because people pay slightly more for newly-issued Treasuries.)
Hey everyone just wanted to resurrect this threat as Vanguard now has 3 month brokered CDs yielding 5.05%. I wanted to tie up some of my emergency funds into this. Any concerns about that?
Stinky wrote: ↑Thu Nov 10, 2022 11:24 am
There’s no way I’d buy an 11 year CD that is callable in 1 year.
If interest rates go up, I’m stuck with the CD until 2033.
If interest rates go down, the CD will be called and I’ll need to reinvest in 1 year at a lower rate.
Not an attractive situation.
Sorry -- I'm not following how you would be "stuck" with the CD. Can you explain? Isn't the whole point of brokered CDs that you can sell them if you need to (albeit sometimes at a loss)?
Stinky wrote: ↑Thu Nov 10, 2022 11:24 am
There’s no way I’d buy an 11 year CD that is callable in 1 year.
If interest rates go up, I’m stuck with the CD until 2033.
If interest rates go down, the CD will be called and I’ll need to reinvest in 1 year at a lower rate.
Not an attractive situation.
Sorry -- I'm not following how you would be "stuck" with the CD. Can you explain? Isn't the whole point of brokered CDs that you can sell them if you need to (albeit sometimes at a loss)?
Sure you might be able to sell it. The secondary market for CDs isn't nearly as liquid as Treasuries. With a callable CD, the bank will call it as soon as possible if favorable to them. You're stuck with it or have to unload it, probably with a haircut.
Stinky wrote: ↑Thu Nov 10, 2022 11:24 am
There’s no way I’d buy an 11 year CD that is callable in 1 year.
If interest rates go up, I’m stuck with the CD until 2033.
If interest rates go down, the CD will be called and I’ll need to reinvest in 1 year at a lower rate.
Not an attractive situation.
Sorry -- I'm not following how you would be "stuck" with the CD. Can you explain? Isn't the whole point of brokered CDs that you can sell them if you need to (albeit sometimes at a loss)?
If rates rise, the CD you hold at lower interest rates will decrease in value to the point where it reaches equilibrium with new CDs at a higher rate. So if you sell your 5% CD at a loss and buy a new CD for 6%, you still only make 5% on original investment factoring in that loss. And probably honestly a bit less because now you would have some bid/ask spreads and maybe a small trading fee in the mix.
If you just sell and don't buy a new CD, then you have just a loss because you had to sell at a discount. And it can be a significant loss. Right now at etrade I can find a Goldman Sachs CD maturing in 3 years that only has a 2.15% coupon. The Bids for that CD are only 90.87, meaning if the original holder sells now they would lose over 9% on their original principal.
Stinky wrote: ↑Thu Nov 10, 2022 11:24 am
There’s no way I’d buy an 11 year CD that is callable in 1 year.
If interest rates go up, I’m stuck with the CD until 2033.
If interest rates go down, the CD will be called and I’ll need to reinvest in 1 year at a lower rate.
Not an attractive situation.
Sorry -- I'm not following how you would be "stuck" with the CD. Can you explain? Isn't the whole point of brokered CDs that you can sell them if you need to (albeit sometimes at a loss)?
Buying a brokered CD (especially a long one) with a short call date is the classic “lose, lose” situation.
If rates go down, you lose, because the bank will call the CD well short of the maturity date.
If rates go up, you lose, because you either need to keep a CD yielding less than market rates, or try to sell it at a loss.
Lose, lose for you.
Retired life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
Kaymaza wrote: ↑Thu Mar 16, 2023 11:51 am
Hey everyone just wanted to resurrect this threat as Vanguard now has 3 month brokered CDs yielding 5.05%. I wanted to tie up some of my emergency funds into this. Any concerns about that?
Kaymaza wrote: ↑Thu Mar 16, 2023 11:51 am
Hey everyone just wanted to resurrect this threat as Vanguard now has 3 month brokered CDs yielding 5.05%. I wanted to tie up some of my emergency funds into this. Any concerns about that?
For $10,000, the difference between that three-month CD and a MM fund like VUSXX is $12, and your money won't be tied up at all.
Yup. If it's truly for emergencies you don't want to worry about unloading a brokered CD when you need the money. Many other more liquid options that will pay an insignificantly lower amount of interest.
