Some 'hints' about brokered CDs

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
dm200
Posts: 13228
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Some 'hints' about brokered CDs

Post by dm200 » Sat Apr 01, 2017 4:24 pm

As long as you understand the pros and cons of "brokered" CDs, I believe they can be useful for fixed income. I manage investments for an organization (part time) and we hold a lot of Vanguard brokered CDs. A few things I have learned about the ways to better utilize Brokered CDs (at Vanguard):

1. I mostly buy new issue CDs. However, I also search for those on the secondary market selling at a discount (to keep all funds FDIC insured). Occasionally I find the same rate and maturity as a new issue, but selling at a discount (even taking into account the brokerage fee).

2. I buy mostly noncallable brokered CDs, but sometimes (for an extra 5-10 basis points) I buy a callable brokered CD. Small risk (I believe) for a slightly higher return.

3. While I usually look for standard or common terms/maturities (12 months, 24 months, etc.), I also do a search for slightly longer or shorter terms. I recently found that a 13 month term was paying 15 basis points higher than a 12 month. Since it fits my ladder, I have been buying 13 month terms vs 12 month for 2 months. That seems to be a continuing pattern for a while.

4. The settlement date for new issues can be from a few days to a few weeks in the future. You can place an order for a new issue CD without having the funds in the settlement MM fund if you have existing CDs maturing on or before the settlement date. That allows staying more fully invested in these CDs.

5. I keep a daily list of rates and terms so that I can wait a day or two if the desired term/maturity rate seems to be abnormally low, for some reason.

6. I almost always do everything online, but you can always talk to a broker at Vanguard at no additional cost or charge.

If anyone has any other "hints" - I am interested as well.

User avatar
LadyGeek
Site Admin
Posts: 40490
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Some 'hints' about brokered CDs

Post by LadyGeek » Sun Apr 02, 2017 3:06 pm

This thread is now in the Investing - Theory, News & General forum (theory).

See the wiki: Brokered CDs

- You can't withdraw part of a brokered CD for retirement account distributions. The brokered CD will have to be sold.
- Know who issued the CD, as FDIC insurance may not apply as you think.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

sport
Posts: 5973
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Some 'hints' about brokered CDs

Post by sport » Sun Apr 02, 2017 3:36 pm

LadyGeek wrote:This thread is now in the Investing - Theory, News & General forum (theory).

See the wiki: Brokered CDs

- You can't withdraw part of a brokered CD for retirement account distributions. The brokered CD will have to be sold.
- Know who issued the CD, as FDIC insurance may not apply as you think.

LadyGeek,
Please expand on your comment about FDIC. It would seem that FDIC insurance either does or does not apply.

User avatar
dm200
Posts: 13228
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Some 'hints' about brokered CDs

Post by dm200 » Sun Apr 02, 2017 3:39 pm

LadyGeek wrote:This thread is now in the Investing - Theory, News & General forum (theory).

See the wiki: Brokered CDs

- You can't withdraw part of a brokered CD for retirement account distributions. The brokered CD will have to be sold.
- Know who issued the CD, as FDIC insurance may not apply as you think.


As best I understand, all Vanguard brokered CDs are from FDIC insured banks/institutions. As long as total holdings from one institution [occasionally there are two named institutions that count as one for FDIC purposes, such as Bank of India NY and Bank of India Chicago] stay within the FDIC limits, you are safe with anything you buy at Vanguard.

smackboy1
Posts: 902
Joined: Wed Mar 14, 2007 9:41 pm

Re: Some 'hints' about brokered CDs

Post by smackboy1 » Sun Apr 02, 2017 3:47 pm

I invest in brokered CDs because at current rates they typically yield more than the equivalent US treasury debt. The risk is the same as US treasury debt because of FDIC insurance up to $250,000.00 per depositor per bank.

Sometimes it is not 100% obvious which issuers are considered the same bank for FDIC purposes. For example: GE Capital Retail Bank changed its name to Synchrony Bank a few years ago. The FDIC #s are the same, which is a clue. Also, some GE Capital CDs were acquired by Goldman Sachs in recent years when GE closed down it's financial arm. So it's possible to inadvertently exceed the FDIC limit by owning $250K of Goldman Sachs CDs and $250K of GE Capital CDs. In some situations, banks with different FDIC #s are actually the same underlying bank e.g. State Bank of India.

If there is any question that the FDIC limit might be exceeded, the easiest way to be sure is to contact the fixed income desk and give them the CUSIPs and ask for confirmation.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

TBillT
Posts: 276
Joined: Sat Sep 17, 2011 1:43 pm

Re: Some 'hints' about brokered CDs

Post by TBillT » Sun Apr 02, 2017 4:16 pm

I've done quite a few brokered CD's at Fidelity. Normally they almost all say FDIC so I assume that means FDIC insured. Right now I am not seeing bargains, many here jumped on the Andrews FCU 3% which is a better deal in some ways. If you have the broker CD and rates go to 5% you are stuck with a capital loss. I have some that have a nice gain, but it is often hard to find a market to sell back to take the gain. Sometimes I can sell back at the gain. I think for very elderly with SO Survivor option, they can play a role. But I agree if you keep on eye on it, and bonds, sometimes you can see a good deal. I am rusty at the moment, and/or the deals aren't there right now.

aristotelian
Posts: 2824
Joined: Wed Jan 11, 2017 8:05 pm

Re: Some 'hints' about brokered CDs

Post by aristotelian » Sun Apr 02, 2017 4:27 pm

Just curious, if I get a bunch of brokered CD's from different banks through VG or Schwab, will I get separate 1099-INT's from each one?

User avatar
Kevin M
Posts: 8840
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Some 'hints' about brokered CDs

Post by Kevin M » Sun Apr 02, 2017 4:31 pm

Good tips, dm200.

TBillT, nice, concise summary of some of the tradeoffs between brokered and direct CDs, and also good to point out the death put option. I've been sticking with direct CDs for last 6+ years due to generally higher yields and the very valuable early withdrawal option, but I understand dm200s reasons for using brokered CDs. Either way you generally have been getting nice yield premiums over Treasuries of same maturity (my average over last 6+ years is > 100 basis points, and over last 1.5 years about 150 basis points).

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Artsdoctor
Posts: 2880
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Some 'hints' about brokered CDs

Post by Artsdoctor » Sun Apr 02, 2017 4:44 pm

I have used brokered CDs for many years and agree with your assessment. I have bought brokered CDs at a premium as well, although I am very well aware that the CD is only FDIC-insured for par (e.g., if you pay $26,000 for a $25,000 CD to get a "higher" monthly payment and the bank runs into problems, you're only guaranteed to get that $25,000).

You can sell brokered CDs, and in a falling rate environment, you can sell a premium CD for a relatively "fair" price. However, you shouldn't count on it; if you buy a brokered CD, you should anticipate holding it until maturity.

Also, if you're holding a very high balance in brokered CDs in your IRA and you're taking RMDs, your RMDs will be calculated based on market value and not par value. This can be beneficial, or not, depending on your needs. In this regard, they really operate like individual bonds.

larryswedroe
Posts: 15598
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Some 'hints' about brokered CDs

Post by larryswedroe » Sun Apr 02, 2017 5:55 pm

FWIW, almost always better off buying in secondary market, higher yields. Also would avoid callables as historically not well rewarded and risks don't mix well with equities
Larry

Geologist
Posts: 1096
Joined: Fri Jan 02, 2009 7:35 pm

Re: Some 'hints' about brokered CDs

Post by Geologist » Sun Apr 02, 2017 6:08 pm

aristotelian wrote:Just curious, if I get a bunch of brokered CD's from different banks through VG or Schwab, will I get separate 1099-INT's from each one?


If you buy from Vanguard, you will get all the interest summarized on your Vanguard Brokerage 1099. The redemptions will show up there too; if you buy at issue, then cost equals redemption value, so there is no capital gain.

curmudgeon
Posts: 1254
Joined: Thu Jun 20, 2013 11:00 pm

Re: Some 'hints' about brokered CDs

Post by curmudgeon » Sun Apr 02, 2017 6:41 pm

A timely thread for me, as I expect to build a few years of a fixed income ladder in the next few months. I'm chewing over options of individual bonds, brokered CDs, direct CDs, and bond funds. I will probably end up with a mixture.

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: Some 'hints' about brokered CDs

Post by S17C » Sun Apr 02, 2017 9:18 pm

I invested into CDs during 2008-2009 (and far too long afterward).

dm200 wrote:4. The settlement date for new issues can be from a few days to a few weeks in the future. You can place an order for a new issue CD without having the funds in the settlement MM fund if you have existing CDs maturing on or before the settlement date. That allows staying more fully invested in these CDs.

Fidelity won't allow this (at least as of 2014-2015). A couple years ago I wanted to buy 50 of 3.35% that wouldn't settle for two weeks and the available quantity was selling-out fast. I had a 75 CD maturing in one day. I called the fixed income desk. Supervisor said maturing Brokered CDs can sometimes snag and be held for a month before paying out to Fidelity. Therefore, Fidelity won't give any 'credit' for imminently maturing CDs. Fidelity, however, allows buying up to 25 immediately as long as a bank transfer into Fidelity for 25K has been scheduled.

I've had Fidelity CDs miss a scheduled interest payment. Each time I called in, Fidelity already had a note in the system that they were following-up with the issuer. Interest usually showed-up in the account about a week late.

Also, I learned: If a CD is selling fast and sells out, then check back the next day. Often it will be replenished with more shares to sell.

I pay attention to the quantity available, and I used to be surprised that 12 month CDs with lower interest rates would sell well compared to other 12 month CDs with higher interest rates. I used to think that investors were purposely trying to keep their taxable income low by purchasing the lower interest rate. Probably not. Then I had thought that purchasers were shying away from foreign bank names, thinking it was a riskier investment (even though it had FDIC). Nope. Here's why investors probably purchase a CD with a lower interest rate: interest in the lower rate CD is paid out monthly compared to the higher rate CD which only pays out semiannually. I guess buyers like more frequent payouts and are willing to take lower interest. There's probably more to this story.

If bought into a CD and am waiting for the purchase to go settle(could take days), then I can still cancel it if there's a new offering at higher interest rate.

Can sometimes tell if my callable CD will be called by looking at the offerings ahead of the call date. If that particular bank is offering CDs for lower rates than what they are paying me, then they are taking others' money at a lower interest rate and will probably pay me off.

Have never once been called at premium above par. The issuer waits until the next par call and then pays it off.

I despise callable CDs with a call schedule of 05-01-2017; 06-01-2017; 07-01-2017; 08-01-2017; 09-01-2017....for years, all the way until maturity.

anoop
Posts: 434
Joined: Tue Mar 04, 2014 1:33 am

Re: Some 'hints' about brokered CDs

Post by anoop » Mon Apr 03, 2017 12:03 am

smackboy1 wrote:I invest in brokered CDs because at current rates they typically yield more than the equivalent US treasury debt. The risk is the same as US treasury debt because of FDIC insurance up to $250,000.00 per depositor per bank.


No state tax for UST, and also much more liquid if need to sell before maturity.

jebmke
Posts: 6675
Joined: Thu Apr 05, 2007 2:44 pm

Re: Some 'hints' about brokered CDs

Post by jebmke » Mon Apr 03, 2017 1:14 am

anoop wrote:
smackboy1 wrote:I invest in brokered CDs because at current rates they typically yield more than the equivalent US treasury debt. The risk is the same as US treasury debt because of FDIC insurance up to $250,000.00 per depositor per bank.


No state tax for UST, ...

True, but for many, taxable bonds are held in IRAs so the state tax exemption doesn't apply.
When you discover that you are riding a dead horse, the best strategy is to dismount.

User avatar
Kevin M
Posts: 8840
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Some 'hints' about brokered CDs

Post by Kevin M » Mon Apr 03, 2017 11:40 am

anoop wrote:
smackboy1 wrote:I invest in brokered CDs because at current rates they typically yield more than the equivalent US treasury debt. The risk is the same as US treasury debt because of FDIC insurance up to $250,000.00 per depositor per bank.

No state tax for UST, and also much more liquid if need to sell before maturity.

Even after considering state tax, the yield premium on a good CD is paying you a very nice illiquidity premium compared to Treasuries.

As mentioned, my average yield premium over last six years has been more than 100 bps, so let's say 2.5% for CD compared to 1.5% for Treasury. After CA state tax of 9.3%, for example, the CD yield is 2.27%, so still a yield premium of 77 bps. And if you go with direct CDs with good early withdrawal terms, in preference to brokered CDs, the early withdrawal option reduces your term risk significantly, especially in the early years of the term.

Keep some Treasuries if you want for the liquidity you need, or just keep it in a 1% savings account. Yield on 1-month Treasury is 0.74%. After state tax of 9.3%, yield on 1% savings account is 0.91%, so an FDIC-insured savings account has higher yield and even better liquidity (less term risk) than a comparable Treasury, even after state tax. You have to go to the 6-month Treasury at 0.91%, taking on the additional term risk, to match the after-state-tax yield of the 1% savings account.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

baliktad
Posts: 18
Joined: Sun Mar 26, 2017 12:13 pm

Re: Some 'hints' about brokered CDs

Post by baliktad » Thu Oct 05, 2017 1:12 pm

Have browsed several threads on brokered CD's and this one seems the closest to my question.

I submitted orders for 2 brokered CD's through Fidelity yesterday, both new issues:

CD1:
Duration: 3 months
Interest Accrual Date: 11 Oct 2017
Maturity Date: 11 Jan 2018

CD2:
Duration: 6 months
Interest Accrual Date: 20 Oct 2017
Maturity Date: 20 Apr 2017

I wasn't exactly sure whether the orders would complete yesterday, on the interest accrual date, or some other date. I was somewhat surprised that the order for CD1 filled today, taking the funds out of my cash balance. My understanding is that the Interest Accrual Date is the date that interest begins to be paid, so is it correct to state that I am not compensated for the time after purchase but prior to the Interest Accrual Date?

Is this normal to have a period of 1-2+ weeks of lag time after the CD is purchased but before interest starts accruing?

What exactly causes the order to be filled? If a CD is listed for purchase and I place an order for it, what determines when the order will complete? Does the issuing bank approve/accept orders manually or is this determined by the broker or some determined schedule?

Thanks for any tips or insight.

User avatar
dm200
Posts: 13228
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Some 'hints' about brokered CDs

Post by dm200 » Thu Oct 05, 2017 1:21 pm

baliktad wrote:
Thu Oct 05, 2017 1:12 pm
Have browsed several threads on brokered CD's and this one seems the closest to my question.
I submitted orders for 2 brokered CD's through Fidelity yesterday, both new issues:
CD1:
Duration: 3 months
Interest Accrual Date: 11 Oct 2017
Maturity Date: 11 Jan 2018
CD2:
Duration: 6 months
Interest Accrual Date: 20 Oct 2017
Maturity Date: 20 Apr 2017
I wasn't exactly sure whether the orders would complete yesterday, on the interest accrual date, or some other date. I was somewhat surprised that the order for CD1 filled today, taking the funds out of my cash balance. My understanding is that the Interest Accrual Date is the date that interest begins to be paid, so is it correct to state that I am not compensated for the time after purchase but prior to the Interest Accrual Date?
Is this normal to have a period of 1-2+ weeks of lag time after the CD is purchased but before interest starts accruing?
What exactly causes the order to be filled? If a CD is listed for purchase and I place an order for it, what determines when the order will complete? Does the issuing bank approve/accept orders manually or is this determined by the broker or some determined schedule?
Thanks for any tips or insight.
For an organization I manage, I buy a lot of brokered CD at Vanguard - mostly new issues.

As far as I know and understand, there should be no delay or lack of compensation for the time you hold the CD.

For new orders (at Vanguard), there is a settlement day - some number of days in the future.

Are you sure the funds were actually taken from the cash balance? At Vanguard, the funds are made "unavailable" for some number of days before the settlement date - when the funds actually move. My best guess is that the funds are "unavailable" and not actually gone.

baliktad
Posts: 18
Joined: Sun Mar 26, 2017 12:13 pm

Re: Some 'hints' about brokered CDs

Post by baliktad » Fri Oct 06, 2017 1:01 am

dm200 wrote:
Thu Oct 05, 2017 1:21 pm
For an organization I manage, I buy a lot of brokered CD at Vanguard - mostly new issues.

As far as I know and understand, there should be no delay or lack of compensation for the time you hold the CD.

For new orders (at Vanguard), there is a settlement day - some number of days in the future.

Are you sure the funds were actually taken from the cash balance? At Vanguard, the funds are made "unavailable" for some number of days before the settlement date - when the funds actually move. My best guess is that the funds are "unavailable" and not actually gone.
Fidelity shows "Cash (core)" which is the total cash I was holding prior to the purchase, a negative "Cash Debit" value equivalent to the amount of the CD purchased, and the remainder as "settled cash" and "cash available to withdraw." So yes, the purchase does seem to have reduced the actual cash available to me. If the CD purchase is like other securities, I expect the cash debit to clear in 2 days once the transaction "settles." This will still be a few days prior to the Interest Accrual date on the CD.

Mostly just wondering if this is normal/expected to buy and pay for a CD days/weeks before the interest starts accruing.

User avatar
dm200
Posts: 13228
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Some 'hints' about brokered CDs

Post by dm200 » Fri Oct 06, 2017 7:32 am

baliktad wrote:
Fri Oct 06, 2017 1:01 am
dm200 wrote:
Thu Oct 05, 2017 1:21 pm
For an organization I manage, I buy a lot of brokered CD at Vanguard - mostly new issues.
As far as I know and understand, there should be no delay or lack of compensation for the time you hold the CD.
For new orders (at Vanguard), there is a settlement day - some number of days in the future.
Are you sure the funds were actually taken from the cash balance? At Vanguard, the funds are made "unavailable" for some number of days before the settlement date - when the funds actually move. My best guess is that the funds are "unavailable" and not actually gone.
Fidelity shows "Cash (core)" which is the total cash I was holding prior to the purchase, a negative "Cash Debit" value equivalent to the amount of the CD purchased, and the remainder as "settled cash" and "cash available to withdraw." So yes, the purchase does seem to have reduced the actual cash available to me. If the CD purchase is like other securities, I expect the cash debit to clear in 2 days once the transaction "settles." This will still be a few days prior to the Interest Accrual date on the CD.
Mostly just wondering if this is normal/expected to buy and pay for a CD days/weeks before the interest starts accruing.
Sounds like Fidelity does some things dofferently than Vanguard. At Vanguard, the funds for the future settlement of the CD purchase are in the Settlement fund (Federal MM) and earning dividends -- BUT are unavailable to me for withdrawal or transactions.

hirlaw
Posts: 180
Joined: Tue Sep 29, 2009 10:20 am

Re: Some 'hints' about brokered CDs

Post by hirlaw » Fri Oct 06, 2017 9:18 am

I have both brokered and non-brokered CD's (purchased from online banks). My one problem with brokered is that the interest is not reinvested --- so, I end up having these small amounts accumulating in a core money market account. Does anyone else consider this issue?

User avatar
dm200
Posts: 13228
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Some 'hints' about brokered CDs

Post by dm200 » Fri Oct 06, 2017 9:21 am

hirlaw wrote:
Fri Oct 06, 2017 9:18 am
I have both brokered and non-brokered CD's (purchased from online banks). My one problem with brokered is that the interest is not reinvested --- so, I end up having these small amounts accumulating in a core money market account. Does anyone else consider this issue?
Yes - that is an aspect of brokered CDs. Depending on all the details and circumstances, it may or may not be an issue.

In my case, managing an organization (part time), we do not reinvest any CD interest - for accounting, management, etc. reasons.

hirlaw
Posts: 180
Joined: Tue Sep 29, 2009 10:20 am

Re: Some 'hints' about brokered CDs

Post by hirlaw » Fri Oct 06, 2017 9:27 am

Yes - that is an aspect of brokered CDs. Depending on all the details and circumstances, it may or may not be an issue.

In my case, managing an organization (part time), we do not reinvest any CD interest - for accounting, management, etc. reasons.
Right. If you are a retiree (or organization) and are intending to spend the interest and/or stock dividends in your brokerage accounts, then it would make sense, but otherwise I feel like I am losing the benefits of compounding.

92irish
Posts: 170
Joined: Thu Mar 01, 2007 12:05 pm

Re: Some 'hints' about brokered CDs

Post by 92irish » Fri Oct 06, 2017 9:43 am

Another Tip: If you are going to buy a secondary market CD at a premium, you should double check the bank's credit worthiness. As pointed out above, FDIC does not cover the amount you have paid at a premium. Bankrate.com has a "Safe & Sound" rating system that you can plug in the name of the bank and get some idea of its financial position.

User avatar
TheTimeLord
Posts: 4511
Joined: Fri Jul 26, 2013 2:05 pm

Re: Some 'hints' about brokered CDs

Post by TheTimeLord » Fri Oct 06, 2017 9:46 am

hirlaw wrote:
Fri Oct 06, 2017 9:18 am
I have both brokered and non-brokered CD's (purchased from online banks). My one problem with brokered is that the interest is not reinvested --- so, I end up having these small amounts accumulating in a core money market account. Does anyone else consider this issue?
Nope, just invest it in my Total Market Fund.
Run, You Clever Boy!

Post Reply