"Free Lunch" - secondary brokered CDs?

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dm200
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"Free Lunch" - secondary brokered CDs?

Post by dm200 » Mon Oct 10, 2016 7:28 pm

I notice this from time to time and made a post a while ago. This seems to be an occasional "oddity" of brokered CDs. The best rate for new issue 5 yr brokered CDs was from Capital One at a rate of 1.70%. Yet, if you buy a secondary market for about the same maturity, you get about 1.90% for the same rate (1.70%) because you can buy at a discount. I notice similar Capital One CDs with discounts like that with many different maturity dates.

xenial
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Re: "Free Lunch" - secondary brokered CDs?

Post by xenial » Mon Oct 10, 2016 7:37 pm

I agree, but note that any amount you pay over par ($100) is not FDIC insured. There's still usually a modest free lunch available if you restrict yourself to CDs with ask price of $100 or less.

miles monroe
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Re: "Free Lunch" - secondary brokered CDs?

Post by miles monroe » Mon Oct 10, 2016 8:00 pm

response edited; misread opening post.
Last edited by miles monroe on Tue Oct 11, 2016 3:03 pm, edited 1 time in total.

stlutz
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Re: "Free Lunch" - secondary brokered CDs?

Post by stlutz » Mon Oct 10, 2016 10:43 pm

I've noticed that issuance of brokered CDs has been quite limited of late. I think that's partially a factor right now--there just aren't as many new issues as there have been at other times.

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Rob5TCP
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Re: "Free Lunch" - secondary brokered CDs?

Post by Rob5TCP » Mon Oct 10, 2016 10:51 pm

I've checked brokered rates and secondary and it seems some CU's give better rates than the best brokered.
Below is the current best from deposit accounts

My last CD purchase was 7 year at 3% with a 6 month EWP.

https://www.depositaccounts.com/blog/cd-rates-survey/

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dm200
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Re: "Free Lunch" - secondary brokered CDs?

Post by dm200 » Tue Oct 11, 2016 10:03 am

xenial wrote:I agree, but note that any amount you pay over par ($100) is not FDIC insured. There's still usually a modest free lunch available if you restrict yourself to CDs with ask price of $100 or less.
True - if you pay a premium. This example, however, is/was offered at a discount to par.

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saltycaper
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Re: "Free Lunch" - secondary brokered CDs?

Post by saltycaper » Tue Oct 11, 2016 2:20 pm

miles monroe wrote:if you buy from capital 1 and you have to redeem that cd early you'll get 100% of your face value back (minus an interest penalty).

if you buy on the secondary market and you have to redeem early you'll get whatever the market deems that cd to be worth.

seems to me you should expect to get more interest on the secondary market to account for this.
The question here isn't direct bank CD with early withdrawal penalty versus brokered CD, which you are describing, but rather new-issue brokered CD versus secondary-market brokered CD, neither of which are guaranteed to be redeemable for face value on demand.

It continues to perplex me. Premium CDs I can see. CDs from different banks I can see. But for a discount CD from the same bank, the only two things I see are the commission/concession fee, usually pretty small, and the lot size. Maybe a lot of new-issue buyers are buying very large lots (close to $250,000)? For smaller lots, it might not be a free lunch, maybe a free appetizer, but I've found it tasty thus far.
Quod vitae sectabor iter?

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Re: "Free Lunch" - secondary brokered CDs?

Post by miles monroe » Tue Oct 11, 2016 3:03 pm

saltycaper wrote:
miles monroe wrote:if you buy from capital 1 and you have to redeem that cd early you'll get 100% of your face value back (minus an interest penalty).

if you buy on the secondary market and you have to redeem early you'll get whatever the market deems that cd to be worth.

seems to me you should expect to get more interest on the secondary market to account for this.
The question here isn't direct bank CD with early withdrawal penalty versus brokered CD, which you are describing, but rather new-issue brokered CD versus secondary-market brokered CD, neither of which are guaranteed to be redeemable for face value on demand.

It continues to perplex me. Premium CDs I can see. CDs from different banks I can see. But for a discount CD from the same bank, the only two things I see are the commission/concession fee, usually pretty small, and the lot size. Maybe a lot of new-issue buyers are buying very large lots (close to $250,000)? For smaller lots, it might not be a free lunch, maybe a free appetizer, but I've found it tasty thus far.
you are absolutely correct, i misread the opening post.

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Re: "Free Lunch" - secondary brokered CDs?

Post by curmudgeon » Tue Oct 11, 2016 3:22 pm

saltycaper wrote: It continues to perplex me. Premium CDs I can see. CDs from different banks I can see. But for a discount CD from the same bank, the only two things I see are the commission/concession fee, usually pretty small, and the lot size. Maybe a lot of new-issue buyers are buying very large lots (close to $250,000)? For smaller lots, it might not be a free lunch, maybe a free appetizer, but I've found it tasty thus far.
I wonder if there is an implicit "risk premium" involved. The resale market is less well understood/trusted by buyers because they have greater concerns about fraud or misdealing when they are not the original purchasers. I personally have no basis to know whether such concerns would have (potential) foundation or not. There were a lot of lessons learned for 2008 about counterparty risk, but it is certainly possible for folks to misapply them.

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Re: "Free Lunch" - secondary brokered CDs?

Post by Theoretical » Tue Oct 11, 2016 4:02 pm

curmudgeon wrote:
saltycaper wrote: It continues to perplex me. Premium CDs I can see. CDs from different banks I can see. But for a discount CD from the same bank, the only two things I see are the commission/concession fee, usually pretty small, and the lot size. Maybe a lot of new-issue buyers are buying very large lots (close to $250,000)? For smaller lots, it might not be a free lunch, maybe a free appetizer, but I've found it tasty thus far.
I wonder if there is an implicit "risk premium" involved. The resale market is less well understood/trusted by buyers because they have greater concerns about fraud or misdealing when they are not the original purchasers. I personally have no basis to know whether such concerns would have (potential) foundation or not. There were a lot of lessons learned for 2008 about counterparty risk, but it is certainly possible for folks to misapply them.
It's not a free lunch. Unlike treasuries, you might not have access to your money in a financial crisis to buy stocks at pennies on the dollar if you want to re-balance. 99%+ of the time, the partial illiquidity of an EWP (and risk of temporary total illiquidity) is worth the risk and pays off.

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Re: "Free Lunch" - secondary brokered CDs?

Post by DetroitRick » Tue Oct 11, 2016 4:07 pm

I've used both over the past 7 years. Sometimes I see that bigger spread, sometimes not much difference.

If there is any chance you won't want to hold them to maturity, compare any secondary market sales commission that your broker might charge to the direct early withdrawal penalty. Up until the past month, Schwab levied a telephone-assist broker charge on secondary sales (you couldn't just sell them yourself online). Now that has just changed - you can either sell them online for $1 per $1000 CD ($10 min, $250 max) or via telephone broker (that online charge + $25 per trade). Not sure if other brokers do similar. I'm also curious as to liquidity on the secondary sale, but have never needed to do so yet (probably never will on 1-year instruments myself, which is most of what I buy).

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Re: "Free Lunch" - secondary brokered CDs?

Post by FillorKill » Tue Oct 11, 2016 4:14 pm

Theoretical wrote: It's not a free lunch. Unlike treasuries, you might not have access to your money in a financial crisis to buy stocks at pennies on the dollar if you want to re-balance. 99%+ of the time, the partial illiquidity of an EWP (and risk of temporary total illiquidity) is worth the risk and pays off.
In context it is a free lunch. Once you've decided to accept the relative illiquidity of the brokered CD market, then obtaining a yield of 1.9 via secondary market v 1.7 initial issue, all else equal, is an unequivocal win. If you take a step back to consider other options, such as direct CDs, then that's a different story.

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dm200
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Re: "Free Lunch" - secondary brokered CDs?

Post by dm200 » Tue Oct 11, 2016 9:03 pm

It's not a free lunch. Unlike treasuries, you might not have access to your money in a financial crisis to buy stocks at pennies on the dollar if you want to re-balance. 99%+ of the time, the partial illiquidity of an EWP (and risk of temporary total illiquidity) is worth the risk and pays off.
Yes it is - within the assumption of buying brokered CDs. On Friday, if I bought a five year brokered CD new issue at par, the highest rate/yield was 1.70% from Capital One. If I bought a five year CD on the secondary market at Vanguard with the SAME 1.70% rate, I could buy it at about 99 cents vs. $1.00 for new issue). That 1.70% rate CD yielded about 1.90%. Once purchased, there is NO difference to the holder between the two.

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