Brokered CDs

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
sport
Posts: 8762
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Brokered CDs

Post by sport » Thu Mar 29, 2018 9:48 am

When I look at the brokered CD offerings at Vanguard, I note that there is a range of yields for any given maturity. My question is: Why would anyone want any of the lower yielding offers when higher yields are available? The only good reason I can think of would be if they already have more than 250K at the bank(s) with the higher yields. It would seem that the lower yielding offers will not get many purchasers. Is there something I am missing here?

User avatar
dm200
Posts: 22997
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Brokered CDs

Post by dm200 » Thu Mar 29, 2018 9:54 am

sport wrote:
Thu Mar 29, 2018 9:48 am
When I look at the brokered CD offerings at Vanguard, I note that there is a range of yields for any given maturity. My question is: Why would anyone want any of the lower yielding offers when higher yields are available? The only good reason I can think of would be if they already have more than 250K at the bank(s) with the higher yields. It would seem that the lower yielding offers will not get many purchasers. Is there something I am missing here?
I have often wondered about that as well.

My conclusions:
1. Some number of purchasers (both individuals and organizations) may be hotting the $250K FDIC limit and must choose lower yields to stay under the $250k per bank. [Note that organizations do not have the options available to persons to increase the FDC limit]
2. These brokered CDs often have reatrictions to purchasers in certain states

not4me
Posts: 770
Joined: Thu May 25, 2017 3:08 pm

Re: Brokered CDs

Post by not4me » Thu Mar 29, 2018 10:35 am

I really don't have the answer, but had a couple of thoughts. First, I can't recite which, but I believe some states do not apply income tax in some cases such as a CD issued on a bank in their state. That may not be right though. The 2nd thought -- just because you see them doesn't mean anyone DID buy the lower yielding CD. If I've got one to sell, it seems I could put it out there to be bought & maybe someone will be shopping on a day when mine is the best available

Topic Author
sport
Posts: 8762
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Brokered CDs

Post by sport » Thu Mar 29, 2018 10:43 am

not4me wrote:
Thu Mar 29, 2018 10:35 am
I really don't have the answer, but had a couple of thoughts. First, I can't recite which, but I believe some states do not apply income tax in some cases such as a CD issued on a bank in their state. That may not be right though. The 2nd thought -- just because you see them doesn't mean anyone DID buy the lower yielding CD. If I've got one to sell, it seems I could put it out there to be bought & maybe someone will be shopping on a day when mine is the best available
I should have stated that I was referring to original issue CDs, not the secondary market. Thanks for the clarification.

User avatar
dm200
Posts: 22997
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Brokered CDs

Post by dm200 » Thu Mar 29, 2018 10:57 am

not4me wrote:
Thu Mar 29, 2018 10:35 am
I really don't have the answer, but had a couple of thoughts. First, I can't recite which, but I believe some states do not apply income tax in some cases such as a CD issued on a bank in their state. That may not be right though. The 2nd thought -- just because you see them doesn't mean anyone DID buy the lower yielding CD. If I've got one to sell, it seems I could put it out there to be bought & maybe someone will be shopping on a day when mine is the best available
Right. I suspect (don't know) that some banks put up lower rate offerings and see what happens. If they remain lower rate - they won't be sold, but if the market changes - then sales would occur.

User avatar
Leif
Posts: 2761
Joined: Wed Sep 19, 2007 4:15 pm

Re: Brokered CDs

Post by Leif » Thu Mar 29, 2018 11:04 am

From what I've seen some have call protection and some don't. Generally the ones that don't are higher yielding.

Some names are smaller organizations. Others may have less then stellar ratings so even under FDIC limits you don't want to have to deal with a possible loss of use of your money for a time.

These are just my guesses.

rjbraun
Posts: 1487
Joined: Sun Sep 09, 2012 8:22 pm

Re: Brokered CDs

Post by rjbraun » Thu Mar 29, 2018 12:11 pm

sport wrote:
Thu Mar 29, 2018 9:48 am
When I look at the brokered CD offerings at Vanguard, I note that there is a range of yields for any given maturity. My question is: Why would anyone want any of the lower yielding offers when higher yields are available? The only good reason I can think of would be if they already have more than 250K at the bank(s) with the higher yields. It would seem that the lower yielding offers will not get many purchasers. Is there something I am missing here?
I asked that very question of Vanguard. In addition to someone bumping up against the $250,000 limit for insurance coverage, they mentioned that people may want to stay away from certain issuers, say, a West Coast large bank that has been in the news a lot lately.

Also, conceivably the terms of the CDs may be a consideration. Granted, in many cases we're talking a week or so difference, but I guess either someone is set on a particular maturity date or perhaps they will not have the funds until a settlement date that may be slightly further out in the future.

As a potential buyer of CDs, I suppose it's helpful to see how deep the inventory is of the higher-yielding CDs and then to see how much is behind that and in what size, etc.

User avatar
dm200
Posts: 22997
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Brokered CDs

Post by dm200 » Thu Mar 29, 2018 12:40 pm

rjbraun wrote:
Thu Mar 29, 2018 12:11 pm
sport wrote:
Thu Mar 29, 2018 9:48 am
When I look at the brokered CD offerings at Vanguard, I note that there is a range of yields for any given maturity. My question is: Why would anyone want any of the lower yielding offers when higher yields are available? The only good reason I can think of would be if they already have more than 250K at the bank(s) with the higher yields. It would seem that the lower yielding offers will not get many purchasers. Is there something I am missing here?
I asked that very question of Vanguard. In addition to someone bumping up against the $250,000 limit for insurance coverage, they mentioned that people may want to stay away from certain issuers, say, a West Coast large bank that has been in the news a lot lately.
Also, conceivably the terms of the CDs may be a consideration. Granted, in many cases we're talking a week or so difference, but I guess either someone is set on a particular maturity date or perhaps they will not have the funds until a settlement date that may be slightly further out in the future.
As a potential buyer of CDs, I suppose it's helpful to see how deep the inventory is of the higher-yielding CDs and then to see how much is behind that and in what size, etc.
Good point as well. Other than being FDIC insured, Vanguard makes no distinction based on the stability or potential risk of a bank. A person or organization may, for example, only want to purchase the CDs of a "five star" or other rated bank.

stlutz
Posts: 5516
Joined: Fri Jan 02, 2009 1:08 am

Re: Brokered CDs

Post by stlutz » Thu Mar 29, 2018 8:31 pm

Also a good part of the pool of money buying brokered CDs are doing it in amounts that far exceed FDIC coverage limits. For example, Vanguard Prime Money Market Fund. For them, they are essentially buying a corporate bond. They have to watch their credit risk very closely. The ones that pay higher yields (and it's always the same ones) are considered by the market to be riskier.

User avatar
dm200
Posts: 22997
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Brokered CDs

Post by dm200 » Fri Mar 30, 2018 10:03 am

stlutz wrote:
Thu Mar 29, 2018 8:31 pm
Also a good part of the pool of money buying brokered CDs are doing it in amounts that far exceed FDIC coverage limits. For example, Vanguard Prime Money Market Fund. For them, they are essentially buying a corporate bond. They have to watch their credit risk very closely. The ones that pay higher yields (and it's always the same ones) are considered by the market to be riskier.
I agree with the point, but are such purchases actually "brokered CDs" ?

lahob
Posts: 33
Joined: Mon Feb 26, 2018 10:17 am
Location: USA

Re: Brokered CDs

Post by lahob » Fri Mar 30, 2018 11:10 am

dm200 wrote:
Fri Mar 30, 2018 10:03 am
stlutz wrote:
Thu Mar 29, 2018 8:31 pm
Also a good part of the pool of money buying brokered CDs are doing it in amounts that far exceed FDIC coverage limits. For example, Vanguard Prime Money Market Fund. For them, they are essentially buying a corporate bond. They have to watch their credit risk very closely. The ones that pay higher yields (and it's always the same ones) are considered by the market to be riskier.
I agree with the point, but are such purchases actually "brokered CDs" ?
What else would they be? I doubt the CDs held by the Prime Money Market Fund are direct CDs like those bought by retail customers.

User avatar
dm200
Posts: 22997
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Brokered CDs

Post by dm200 » Fri Mar 30, 2018 11:27 am

lahob wrote:
Fri Mar 30, 2018 11:10 am
dm200 wrote:
Fri Mar 30, 2018 10:03 am
stlutz wrote:
Thu Mar 29, 2018 8:31 pm
Also a good part of the pool of money buying brokered CDs are doing it in amounts that far exceed FDIC coverage limits. For example, Vanguard Prime Money Market Fund. For them, they are essentially buying a corporate bond. They have to watch their credit risk very closely. The ones that pay higher yields (and it's always the same ones) are considered by the market to be riskier.
I agree with the point, but are such purchases actually "brokered CDs" ?
What else would they be? I doubt the CDs held by the Prime Money Market Fund are direct CDs like those bought by retail customers.
I wonder if some kind of negotiated bond - since the amounts are so large.

Topic Author
sport
Posts: 8762
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Brokered CDs

Post by sport » Fri Mar 30, 2018 11:29 am

lahob wrote:
Fri Mar 30, 2018 11:10 am
dm200 wrote:
Fri Mar 30, 2018 10:03 am
stlutz wrote:
Thu Mar 29, 2018 8:31 pm
Also a good part of the pool of money buying brokered CDs are doing it in amounts that far exceed FDIC coverage limits. For example, Vanguard Prime Money Market Fund. For them, they are essentially buying a corporate bond. They have to watch their credit risk very closely. The ones that pay higher yields (and it's always the same ones) are considered by the market to be riskier.
I agree with the point, but are such purchases actually "brokered CDs" ?
What else would they be? I doubt the CDs held by the Prime Money Market Fund are direct CDs like those bought by retail customers.
They could be direct CDs with special terms and conditions arranged between the Prime Money Market fund and the bank(s). When you want to invest tens of millions of dollars, your shopping privileges are much better than those you and I have available.

User avatar
Leif
Posts: 2761
Joined: Wed Sep 19, 2007 4:15 pm

Re: Brokered CDs

Post by Leif » Sun Apr 01, 2018 12:46 am

rjbraun wrote:
Thu Mar 29, 2018 12:11 pm
I asked that very question of Vanguard. In addition to someone bumping up against the $250,000 limit for insurance coverage, they mentioned that people may want to stay away from certain issuers, say, a West Coast large bank that has been in the news a lot lately.
They think Wells Fargo could go belly up? Seems pretty unlikely. They have an "A" rating at DepositAccounts. Texas Ratio of "A". Capitalization of B+. I was thinking to go with them on my next CD. They pay monthly while may pay semi-annually. All pay simple interest.
Last edited by Leif on Sun Apr 01, 2018 1:33 pm, edited 1 time in total.

Call_Me_Op
Posts: 7436
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Brokered CDs

Post by Call_Me_Op » Sun Apr 01, 2018 7:24 am

sport wrote:
Thu Mar 29, 2018 9:48 am
When I look at the brokered CD offerings at Vanguard, I note that there is a range of yields for any given maturity. My question is: Why would anyone want any of the lower yielding offers when higher yields are available? The only good reason I can think of would be if they already have more than 250K at the bank(s) with the higher yields. It would seem that the lower yielding offers will not get many purchasers. Is there something I am missing here?
This is probably due to the fact that some banks are rated higher than others and will tend to offer lower rates. This matters to large institutional clients, which are not covered by FDIC insurance. There is also the issue that FDIC covers principal and not future interest. For these reasons, a brokered CD from a highly-rated bank is in effect worth more for a given rate, and can offer a lower rate while still attracting buyers.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Geologist
Posts: 1432
Joined: Fri Jan 02, 2009 7:35 pm

Re: Brokered CDs

Post by Geologist » Sun Apr 01, 2018 7:57 am

If you look, some banks do not offer their brokered CDs in some states. While this is a limited limitation, it will apply to some purchasers.

Other explanations:
1) banks only offer a limited amount of CD principal value. As the higher yields are purchased, that tends to mean the banks offering lower yields may be all that is left.
2) banks offering lower yields are not so desperate to sell CDs at this maturity and are willing to not get business.

User avatar
dm200
Posts: 22997
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Brokered CDs

Post by dm200 » Sun Apr 01, 2018 9:08 am

Leif wrote:
Sun Apr 01, 2018 12:46 am
rjbraun wrote:
Thu Mar 29, 2018 12:11 pm
I asked that very question of Vanguard. In addition to someone bumping up against the $250,000 limit for insurance coverage, they mentioned that people may want to stay away from certain issuers, say, a West Coast large bank that has been in the news a lot lately.
They think Wells Fargo could go belly up? Seems pretty unlikely. They have an "A" rating at DepositAccounts. Texas Ratio of "A". Capitalization of B+. I was thinking to go with them on my next CD. They pay monthly while many pay semi-annually. All pay simple interest.
Yes - some brokered CDs do pay interest monthly, some quarterly, some semi-annually, some annually and some at maturity (BUT those that pay at maturity are not more than a 12 month term). Interest on brokered CD does not compound in the CD,

rjbraun
Posts: 1487
Joined: Sun Sep 09, 2012 8:22 pm

Re: Brokered CDs

Post by rjbraun » Sun Apr 01, 2018 12:12 pm

Leif wrote:
Sun Apr 01, 2018 12:46 am
rjbraun wrote:
Thu Mar 29, 2018 12:11 pm
I asked that very question of Vanguard. In addition to someone bumping up against the $250,000 limit for insurance coverage, they mentioned that people may want to stay away from certain issuers, say, a West Coast large bank that has been in the news a lot lately.
They think Wells Fargo could go belly up? Seems pretty unlikely. They have an "A" rating at DepositAccounts. Texas Ratio of "A". Capitalization of B+. I was thinking to go with them on my next CD. They pay monthly while many pay semi-annually. All pay simple interest.
Not sure it was people's concern about Wells Fargo's ability to pay but perhaps more a suggestion that some people may prefer to do business elsewhere. This could be for non-financial reasons and more tied to business conduct, ethics and so on, for example

Post Reply