2-year CDs at Vanguard and Fidelity Today

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Kevin M
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2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Thu Apr 05, 2018 11:47 am

Typically Vanguard and Fidelity have had the same new-issue CDs with the highest yields, but today Vanguard has 2-year new-issues at 2.60% from Morgan Stanley Bank (two flavors), while the highest yield on a new issue 2-year CD at Fidelity if 2.55%. Yesterday Fidelity had the same Morgan Stanley CDs at 2.60%, but not now. Between the two MS banks VG has more than 23,000 available (well, now down to a little more than 20,000 since I started writing this). I guess Fidelity already sold its allotment, and it looks like Vanguard may sell out today. These settle 4/12/2018 (next Thursday) and mature 4/13/2020.

Conversely, Fidelity has the 2-year 2.60% Morgan Stanley Bank CD maturing 4/6/2020 on the secondary market at 2.678% (price 99.85), which comes to 2.626% (price 99.95) after commission, while Vanguard doesn't have any competitive 2-year secondary offerings. However, the minimum quantity at Fidelity is 50,with 250 available. Fidelity had the same deal yesterday with minimum quantity of 25. This CD was available as new-issue until a few days ago (I bought some), and it settles today. So it's trading on secondary market before the new issue has settled.

Kevin
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Doc » Thu Apr 05, 2018 11:58 am

And the yield on the 2 yr Treasury is 2.28%. If you factor in state income tax and the the liquidity of the T's if you can't hold to maturity I think I would not make the same choice as Kevin will did. :D
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by stlutz » Thu Apr 05, 2018 12:20 pm

Yeah, I haven't seen anything all that attractive in brokered CDs lately relative to treasuries. In the past I've been able to get more substantial yield premiums that I can now.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Thu Apr 05, 2018 2:30 pm

Buying the CDs mostly in tax-advantaged, so 30 bps yield premium on 2-year and 35-40 bps on 3-year. In taxable, Treasuries are the winner for me out to 1-year and close to a tie to five years, but AA munis are even better (and even AAA). In tax-advantaged Treasuries were the clear winner out to one year in tax-advantaged, but CDs are closing the gap.

I plan to hold these all to maturity, so call it an illiquidity premium if you will.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Thu Apr 05, 2018 2:33 pm

But CD yield premiums definitely have shrunk a lot. Was getting 100-150 bps premium on direct CDs in last couple of years, but now the 20-40 bps premium on the brokered CDs is about the best one can do (unless you jumped on the 5-year 4% CD that was recently available at a credit union). Again, this is in a tax-advantaged account or a state with no income tax.
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by EvelynTroy » Fri Apr 06, 2018 8:21 am

Perhaps of interest - I see that the same Morgan Stanley CDs at 2.60% are offered at Schwab.
Thanks for pointing them out yesterday.
Evelyn

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Fri Apr 06, 2018 11:52 am

There are a few hundred of the new-issue 2-year 2.60% CDs available again at Fidelity, and still a few thousand at Vanguard; these are the ones maturing 4/13/2020. But, there's still a better secondary deal for the 2.60% ones maturing 4/6/2020 at Fidelity, and at Vanguard if you're paying $1 commission. Price at Fidelity is 99.943 with $1 commission for yield of 2.630% (I just bought some), and at Vanguard price is a smidge higher at 99.945 after $1 commission for yield of 2.628%, but if paying $2 commission price is 100.045 for yield of 2.577%, so you're better of with the new issue if paying $2 commission at Vanguard.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by EvelynTroy » Fri Apr 06, 2018 2:51 pm

I do not know how to calculate/assess if the 2 yr. brokered CD @ 2.60% vs. a 17 month 2.30% CD, $1,000 min. deposit offered at Federal Savings Bank, New Hampshire is a better deal. I could not locate anything about EWP on deposit accounts or the FSB website. It seems to me 2.3% would be better with 7 months less on the term.

https://www.depositaccounts.com/banks/f ... promo32784

Thanks.
Evelyn

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Fri Apr 06, 2018 4:02 pm

EvelynTroy wrote:
Fri Apr 06, 2018 2:51 pm
I do not know how to calculate/assess if the 2 yr. brokered CD @ 2.60% vs. a 17 month 2.30% CD, $1,000 min. deposit offered at Federal Savings Bank, New Hampshire is a better deal. I could not locate anything about EWP on deposit accounts or the FSB website. It seems to me 2.3% would be better with 7 months less on the term.

https://www.depositaccounts.com/banks/f ... promo32784

Thanks.
Evelyn
A common guideline is that you want a minimum of 20 basis points per year of extra maturity. If you go by that, the 2-year at 2.60% is worth it to pick up 30 basis points, as this comes out to about 51 bps per year of extra maturity, so well above 20.

At such short terms, an early withdrawal option probably isn't going to be very valuable.

Note that there is an 18-month CD at USAlliance at 2.53%, so if you're already a member, that's a good one to consider.

Is this in an IRA or taxable account? If taxable and you pay state income tax, be sure to look at taxable-equivalent yields of Treasuries. For me, 2-year Treasury TEY in taxable is very close to the 2-year CD (but I'm going by Fidelity summary screen quote, and this typically is for large quantities and a little longer than the indicated maturity). So Treasury TEY probably a little less, but if there's any chance you might not hold to maturity, better liquidity of Treasuries is worth considering.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by feh » Fri Apr 06, 2018 5:19 pm

stlutz wrote:
Thu Apr 05, 2018 12:20 pm
Yeah, I haven't seen anything all that attractive in brokered CDs lately relative to treasuries. In the past I've been able to get more substantial yield premiums that I can now.
+1

I have a fair amount of money in a CD that matures in 6 months. If conditions are the same then as they are now, I'll be buying a short-term bond fund w/ that money.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Fri Apr 06, 2018 8:31 pm

feh wrote:
Fri Apr 06, 2018 5:19 pm
stlutz wrote:
Thu Apr 05, 2018 12:20 pm
Yeah, I haven't seen anything all that attractive in brokered CDs lately relative to treasuries. In the past I've been able to get more substantial yield premiums that I can now.
+1

I have a fair amount of money in a CD that matures in 6 months. If conditions are the same then as they are now, I'll be buying a short-term bond fund w/ that money.
Wow, you guys are tough customers.

So a 30 bps basis point yield premium for the 2-year CD and a 40 bps for the 3-year CD (over Treasuries of same maturities) aren't sufficient (in tax-advantaged)? To put it another way, you have to go to a 5-year Treasury at 2.58% to get about the same yield as a 2-year CD, and you have to go to a 10-year Treasury at 2.77% to get about the same as a 3-year CD. So a ton more term risk to get the same yields. The Treasury yields are as of 4/6 on Treasury.gov.

Sure, the CD yield premiums were much richer in recent years--I was getting 100-150 basis point yield premiums in direct CDs as recently as about 1.5 years ago, but times have changed, and that's no longer the ballgame.

With short-term Treasury bond funds you're owning the short-term Treasuries with the lower yields, so with the fund you're betting that yields won't move against you, and you'll get some sort of roll return because the fund rolls the bonds before they mature (hasn't worked out lately)--or you're just looking for simplicity in return for lower expected return. Just look at the SEC yields: Short-Term Treasury Admiral is 1.93% and Short-Term Treasury Index Admiral is 2.23%, so you can beat these yields handily with just a 2-year CD at 2.60%, not to mention the 3-year CD at 2.80%.

You can get your short-term bond fund SEC yield into the CD ballpark by taking some credit risk in a short-term corporate or investment-grade fund, and that's fine, but the risk-adjusted return of the CD is better by definition, since you aren't taking any credit risk to get the higher yield. I recently established a position in the short-term corporate fund to get the higher yield with some exposure to credit risk (and I continue to hold some intermediate-term investment grade in tax-advantaged and intermediate-term muni funds in taxable for the same reason), but for most of my fixed income, I want more certainty.

Kevin
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by NYCwriter » Fri Apr 06, 2018 8:33 pm

I'm embarrassed to admit I've never purchased CDs on market, only bank CDs (have none at present). I saw Fidelity's CD-ladder and it was enticing, but I have my emergency and extra cash (in lieu of bond funds) in a 1.5% MM. I'm doing some research to see if it's worth doing a 1-year ladder for this cash, or at least a 3- or 6-month.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Sandtrap » Fri Apr 06, 2018 8:40 pm

Kevin M wrote:
Thu Apr 05, 2018 11:47 am
Typically Vanguard and Fidelity have had the same new-issue CDs with the highest yields, but today Vanguard has 2-year new-issues at 2.60% from Morgan Stanley Bank (two flavors), while the highest yield on a new issue 2-year CD at Fidelity if 2.55%. Yesterday Fidelity had the same Morgan Stanley CDs at 2.60%, but not now. Between the two MS banks VG has more than 23,000 available (well, now down to a little more than 20,000 since I started writing this). I guess Fidelity already sold its allotment, and it looks like Vanguard may sell out today. These settle 4/12/2018 (next Thursday) and mature 4/13/2020.

Conversely, Fidelity has the 2-year 2.60% Morgan Stanley Bank CD maturing 4/6/2020 on the secondary market at 2.678% (price 99.85), which comes to 2.626% (price 99.95) after commission, while Vanguard doesn't have any competitive 2-year secondary offerings. However, the minimum quantity at Fidelity is 50,with 250 available. Fidelity had the same deal yesterday with minimum quantity of 25. This CD was available as new-issue until a few days ago (I bought some), and it settles today. So it's trading on secondary market before the new issue has settled.

Kevin
I just had a substantial CD come to term. Need to reinvest it.

Have yet to purchase brokered CD's.

Your thoughts on the New Issue vs Secondary?
I have a Vanguard Acct. No Fidelity.

What do you mean by 20,000 available?

Is this like the bank where I can buy a CD for 500k?

Or are you referring to monetary "lot" sizes and 20,000 of these lot sizes? Confused.

thanks,
jim

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by feh » Fri Apr 06, 2018 9:05 pm

Kevin M wrote:
Fri Apr 06, 2018 8:31 pm

You can get your short-term bond fund SEC yield into the CD ballpark by taking some credit risk in a short-term corporate or investment-grade fund, and that's fine, but the risk-adjusted return of the CD is better by definition, since you aren't taking any credit risk to get the higher yield. I recently established a position in the short-term corporate fund to get the higher yield with some exposure to credit risk (and I continue to hold some intermediate-term investment grade in tax-advantaged and intermediate-term muni funds in taxable for the same reason), but for most of my fixed income, I want more certainty.

Just depends on your priorities. These vehicles (2-3 year CDs, short term bond funds) are the second tier of our emergency fund, so liquidity is somewhat important to me.

And in full disclosure, when I think about "short term bond funds", my preference is VFSUX, which holds quite a bit of corporate bonds.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by OnTrack » Sat Apr 07, 2018 12:02 am

Sandtrap wrote:
Fri Apr 06, 2018 8:40 pm
... What do you mean by 20,000 available? ...
20,000 available means that there are 20,000 units with a face value of $1000 each available for sale. Say you want to buy a face value of $10,000. If the minimum is equal to or less than 10 and the available is equal to or greater than 10, then you can buy 10 units for a face value of $10,000. Of course, if the amount available is low, you would want to complete the transaction quickly or else someone else might buy them first.

If you buy on the secondary market, the amount you pay per $1000 face value most likely will be more or less than $1000 depending on the prevailing interest rates. If you buy new CDs, you will pay exactly $1000 per $1000 of face value with no commission.

One thing to be aware of if you buy on the secondary market. If you pay above face value, the FDIC insurance is only good up to the face value of the CD. However, typically it may be worth taking a small risk on the uninsured premium over face value if the interest rate is higher than a new CD with a similar term.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Sandtrap » Sat Apr 07, 2018 1:03 am

OnTrack wrote:
Sat Apr 07, 2018 12:02 am
Sandtrap wrote:
Fri Apr 06, 2018 8:40 pm
... What do you mean by 20,000 available? ...
20,000 available means that there are 20,000 units with a face value of $1000 each available for sale. Say you want to buy a face value of $10,000. If the minimum is equal to or less than 10 and the available is equal to or greater than 10, then you can buy 10 units for a face value of $10,000. Of course, if the amount available is low, you would want to complete the transaction quickly or else someone else might buy them first.

If you buy on the secondary market, the amount you pay per $1000 face value most likely will be more or less than $1000 depending on the prevailing interest rates. If you buy new CDs, you will pay exactly $1000 per $1000 of face value with no commission.

One thing to be aware of if you buy on the secondary market. If you pay above face value, the FDIC insurance is only good up to the face value of the CD. However, typically it may be worth taking a small risk on the uninsured premium over face value if the interest rate is higher than a new CD with a similar term.
Thanks for the explanation.
Why are direct from a bank CD's not expressed in units?
. . . . or are they?

j

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by sport » Sat Apr 07, 2018 2:41 am

Sandtrap wrote:
Sat Apr 07, 2018 1:03 am
Why are direct from a bank CD's not expressed in units?
. . . . or are they?

j
Because direct CDs can be bought for any odd amount over the minimum, such as $521.89. Brokered CDs are bought in $1000 increments.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by EvelynTroy » Sat Apr 07, 2018 8:05 am

Kevin M wrote:
Fri Apr 06, 2018 4:02 pm
EvelynTroy wrote:
Fri Apr 06, 2018 2:51 pm
I do not know how to calculate/assess if the 2 yr. brokered CD @ 2.60% vs. a 17 month 2.30% CD, $1,000 min. deposit offered at Federal Savings Bank, New Hampshire is a better deal. I could not locate anything about EWP on deposit accounts or the FSB website. It seems to me 2.3% would be better with 7 months less on the term.

https://www.depositaccounts.com/banks/f ... promo32784

Thanks.
Evelyn
A common guideline is that you want a minimum of 20 basis points per year of extra maturity. If you go by that, the 2-year at 2.60% is worth it to pick up 30 basis points, as this comes out to about 51 bps per year of extra maturity, so well above 20.

At such short terms, an early withdrawal option probably isn't going to be very valuable.

Note that there is an 18-month CD at USAlliance at 2.53%, so if you're already a member, that's a good one to consider.

Is this in an IRA or taxable account? If taxable and you pay state income tax, be sure to look at taxable-equivalent yields of Treasuries. For me, 2-year Treasury TEY in taxable is very close to the 2-year CD (but I'm going by Fidelity summary screen quote, and this typically is for large quantities and a little longer than the indicated maturity). So Treasury TEY probably a little less, but if there's any chance you might not hold to maturity, better liquidity of Treasuries is worth considering.
Thanks so much Kevin - this is so helpful. I really do need to know what and why I am buying something. And yes I am a USAlliance member - somehow I missed this announcement of the 18 mo. 2.53% offering.
I do pay state income tax (MO) - where do I find, or how do you calculate the taxable-equivalent yield for Treasuries. My eyes glaze over at the mere mention of taxes - so I'm clear I need to calculate the TEY for Treasury Bonds - once I know my state tax rate, can I use the instructions given here:
https://finance.zacks.com/treasury-bond ... -6879.html

This is all just information I need to know whether I purchase any of these particular CD's or not.
Again, thanks and I do appreciate the help.
Evelyn

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 07, 2018 1:52 pm

NYCwriter wrote:
Fri Apr 06, 2018 8:33 pm
I'm embarrassed to admit I've never purchased CDs on market, only bank CDs (have none at present). I saw Fidelity's CD-ladder and it was enticing, but I have my emergency and extra cash (in lieu of bond funds) in a 1.5% MM. I'm doing some research to see if it's worth doing a 1-year ladder for this cash, or at least a 3- or 6-month.
Vanguard Prime Money Market 7-day yield is 1.73%. Since I'm comfortable with the very tiny amount of credit and liquidity risk, I use this as my 0-year (no term risk) maturity yield. Also, there is a bank now offering 2% on savings. So first thing I would do is find a higher-yielding money market or savings account (if optimizing yield outweighed the simplicity of sticking with your current MM fund).

Three-month Treasury yield is 1.73% (using Treasury.gov yields), so right now I would not buy a 3-month Treasury. Six-month is at 1.91%, and estimated yield for 6-month auction is 1.904%, so comparing to Vanguard Prime MM that's a little less than 20 bps for extending maturity six months, and a little less than 40 bps per year. So going by the 20 bps per year of extra maturity guideline, and comparing to Prime MM, the 6-month Treasury is a good deal. Not so if you're willing to open a new bank account.

Six-month new-issue CD yield at Vanguard is 1.85%, so I would go with the Treasury over the CD. Treasury is even better in a taxable account with state income tax.

A few weeks ago the 6-month auctioned for a smidge under 2%, and Prime MM yield was lower, and also at the time the 3-month yield premium was better; I bought a bit of each at auction at the time.

The best money market yield at Fidelity is lower due to higher expense ratio, so the calculus favors the short-term Treasuries more in an IRA at Fidelity, since you can't easily and quickly move cash between IRAs. But you're talking about an emergency fund, so this is not relevant for you.

Kevin
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 07, 2018 2:05 pm

Sandtrap wrote:
Fri Apr 06, 2018 8:40 pm
I just had a substantial CD come to term. Need to reinvest it.

Have yet to purchase brokered CD's.

Your thoughts on the New Issue vs Secondary?
I have a Vanguard Acct. No Fidelity.
I always look at secondary first, and typically am able to beat new issue by a smidge--somewhere between 2 bps and 7 bps, more on the low end of that range lately. However, if you have less than $500K in Vanguard assets (Voyager Select), you will pay $2 per bond in commission on secondary market, which adds 0.2 points to purchase price (so if bid quote is 99.5, you'll pay 99.7), and at that commission rate, have not been able to beat new issue in last couple of weeks.

If you are Voyager Select or higher, commission is $1 per bond, and at Fidelity it's $1 per bond for all accounts, which adds 0.1 to price. I calculate after-commission yield in a spreadsheet, but if you click through the buy screens, both Vanguard and Fidelity will show you net yield before submitting. One caution is that Fidelity and Vanguard sometimes show slightly different yields for the same price, but the difference is minimal (ditto for my calculated yield and what Fidelity or Vanguard display).

Also note that new-issue CDs may not settle for up to two weeks. I try to wait until closer to settlement to buy new issues, so I have more time to shop the secondary market, but sometimes they sell out.

I see that your other questions have been answered.

Kevin
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 07, 2018 2:15 pm

feh wrote:
Fri Apr 06, 2018 9:05 pm
Just depends on your priorities. These vehicles (2-3 year CDs, short term bond funds) are the second tier of our emergency fund, so liquidity is somewhat important to me.
Understood. I mostly stick with savings accounts, money-market funds and no-penalty CDs for liquidity, factoring in proceeds from upcoming maturing CDs, Treasuries, or munis in taxable. If necessary, I just sell shares of funds for whatever asset classes are over target.
And in full disclosure, when I think about "short term bond funds", my preference is VFSUX, which holds quite a bit of corporate bonds.
Yeah, that (investment-grade) or short-term corporate would be my preferences in tax-advantaged, but I'd probably go with limited-term tax-exempt in taxable due to marginal tax rates (actually do own enough of this fund to qualify for admiral shares), but personally prefer individual AA/AAA munis, as I have more control of sticking to the part of the yield curve I like (out to about three years), get the relevant tax benefits (e.g., no state tax on in-state munis, and no holdings of other high-tax state munis), and often have been able to find higher yields for small lots (like 5 or 10). But I don't expect to sell any of these before maturity, so not my choice for liquidity.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 07, 2018 2:39 pm

EvelynTroy wrote:
Sat Apr 07, 2018 8:05 am
I do pay state income tax (MO) - where do I find, or how do you calculate the taxable-equivalent yield for Treasuries. My eyes glaze over at the mere mention of taxes - so I'm clear I need to calculate the TEY for Treasury Bonds - once I know my state tax rate, can I use the instructions given here:
https://finance.zacks.com/treasury-bond ... -6879.html

This is all just information I need to know whether I purchase any of these particular CD's or not.
Again, thanks and I do appreciate the help.
Evelyn
You're welcome.

TEY depends on whether or not you itemize and report state taxes on Schedule A. If you don't itemize, then on a fully-taxable security or account your after-tax yield is TEY * (1 - f - s), where f is marginal state tax rate and s is marginal state tax rate. If you itemize it's TEY * (1 - f - s + f*s), which can be re-written as TEY * (1 -f)*(1-s).

Your after-tax yield on a Treasury is Yt * (1-f). If we set the fully taxable after-tax yield equal to the Treasury after-tax yield for the no-itemize case:

TEY * (1 - f - s) = Yt * (1-f)

Solving for TEY:

TEY = Yt * (1-f) / (1 - f - s)

For the itemizing case:

TEY * (1-f)*(1-s) = Yt * (1-f)

In this case the (1-f) factors cancel out, leaving

TEY = Yt / (1-s)

This is the equation you'll see most often, as you see in the Zacks article, but it really only applies if you itemize.

Example: Assume Treasury yield is 2%, Fed marginal tax rate is 27%, state marginal tax rate is 8%. TEY for not itemizing is 2.25%, and for itemizing is 2.17%. The state tax exemption is less valuable if you're already getting a federal tax deduction on paying state taxes.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Doc » Sat Apr 07, 2018 2:43 pm

Kevin M wrote:
Sat Apr 07, 2018 2:05 pm
If you are Voyager Select or higher, commission is $1 per bond, and at Fidelity it's $1 per bond for all accounts ...
Regarding Treasuries:

Zero commission if buying at auction.

Schwab's trading commission is zero online.

I belive both Schwab and Fidelity sometimes act as a dealer on Treasuries in which case there is no commission but only the markup which is essentially the same as the spread. (Also VBS.)

There is a two year auction every month - no need to pay markup, commission or spreads.

Kevin, is there a commission on brokered CD's at VBS?
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 07, 2018 4:28 pm

Doc wrote:
Sat Apr 07, 2018 2:43 pm
Kevin M wrote:
Sat Apr 07, 2018 2:05 pm
If you are Voyager Select or higher, commission is $1 per bond, and at Fidelity it's $1 per bond for all accounts ...
Regarding Treasuries:

Zero commission if buying at auction.

Schwab's trading commission is zero online.

I belive both Schwab and Fidelity sometimes act as a dealer on Treasuries in which case there is no commission but only the markup which is essentially the same as the spread. (Also VBS.)

There is a two year auction every month - no need to pay markup, commission or spreads.

Kevin, is there a commission on brokered CD's at VBS?
Was answering a question about CDs.
  • Secondary brokered CDs: $1 or $2 per bond at Vanguard, $1 at Fidelity.
  • New issue CDs: no commission at either.
  • Treasuries, auction or secondary: no commission at either.
For CDs, best bid quotes sometimes are for smallest quantities (I'll sometimes pick up 5 or 7 when I'd buy 10 or more if available). As you know, for Treasuries, best quotes are for larger quantities, like in the hundreds.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Doc » Sat Apr 07, 2018 4:53 pm

Kevin M wrote:
Sat Apr 07, 2018 4:28 pm
Was answering a question about CDs.
Secondary brokered CDs: $1 or $2 per bond at Vanguard, $1 at Fidelity.
New issue CDs: no commission at either.
Treasuries, auction or secondary: no commission at either.
I thought that's what you meant but then I read:
Kevin M wrote:
Sat Apr 07, 2018 2:05 pm
you will pay $2 per bond in commission on secondary market
and decided you were not talking about CD's.

So you are paying $1 or $2 per $1000 face value for the CD is that correct? That's a little higher than Treasuries but not a deal breaker.
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Sandtrap » Sat Apr 07, 2018 6:21 pm

Kevin M wrote:
Sat Apr 07, 2018 2:05 pm
Sandtrap wrote:
Fri Apr 06, 2018 8:40 pm
I just had a substantial CD come to term. Need to reinvest it.

Have yet to purchase brokered CD's.

Your thoughts on the New Issue vs Secondary?
I have a Vanguard Acct. No Fidelity.
I always look at secondary first, and typically am able to beat new issue by a smidge--somewhere between 2 bps and 7 bps, more on the low end of that range lately. However, if you have less than $500K in Vanguard assets (Voyager Select), you will pay $2 per bond in commission on secondary market, which adds 0.2 points to purchase price (so if bid quote is 99.5, you'll pay 99.7), and at that commission rate, have not been able to beat new issue in last couple of weeks.

If you are Voyager Select or higher, commission is $1 per bond, and at Fidelity it's $1 per bond for all accounts, which adds 0.1 to price. I calculate after-commission yield in a spreadsheet, but if you click through the buy screens, both Vanguard and Fidelity will show you net yield before submitting. One caution is that Fidelity and Vanguard sometimes show slightly different yields for the same price, but the difference is minimal (ditto for my calculated yield and what Fidelity or Vanguard display).

Also note that new-issue CDs may not settle for up to two weeks. I try to wait until closer to settlement to buy new issues, so I have more time to shop the secondary market, but sometimes they sell out.

I see that your other questions have been answered.

Kevin
Thanks Kevin. Always great input from you.

Flagship Select for me.

You say, "per bond" and the question was on "brokered CD's". Why did you mention "per bond"?
You mention $1 per "bond". I thought we were addressing CD's?
I'm getting getting the two confused maybe.
What do you mean by "closer to settlement" to buy new issue CD's?
What are the advantages and disadvantages between "New Issue" and "Secondary"?

Thanks for the help.
jim
:D

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 07, 2018 6:32 pm

Doc wrote:
Sat Apr 07, 2018 4:53 pm
Kevin M wrote:
Sat Apr 07, 2018 4:28 pm
Was answering a question about CDs.
Secondary brokered CDs: $1 or $2 per bond at Vanguard, $1 at Fidelity.
New issue CDs: no commission at either.
Treasuries, auction or secondary: no commission at either.
I thought that's what you meant but then I read:
Kevin M wrote:
Sat Apr 07, 2018 2:05 pm
you will pay $2 per bond in commission on secondary market
and decided you were not talking about CD's.

So you are paying $1 or $2 per $1000 face value for the CD is that correct? That's a little higher than Treasuries but not a deal breaker.
Sorry, using "bond" in the generic sense. Pricing is same for secondary munis, for example.

At both Vanguard and Fidelity, quantity of 1 = $1,000 face, so yes, $1 or $2 per $1,000 face for secondary CDs, corporates, munis, etc. at Vanguard, and $1 for everyone at Fidelity.

Your commission level at Vanguard can make the difference between whether or not a secondary CD deal is better than new issue or not. Actual recent example: I bought a 3-year CD on secondary at net yield of 2.822% at $1 commission, so a couple bps more than the new-issue 3-year at 2.80%, and it settled in 2 business days instead of more than a week for new issue. But at $2 commission, net yield was 2.788%, so a bit less than the new issue.

This was one of the smaller premiums I've gotten for secondary CD at $1 commission, but haven't seen them much above 7 bps or so lately, unless you extend maturity at bit. For example, got 2.897% net for a 37.1 month CD at Fidelity a couple of days ago.

But like you say, not a big deal.

With Treasuries (no commission) the issue is more the larger spreads for smaller quantities on secondary market, while smaller investors get the same yield as institutional investors at auction (which of course you already know).

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 07, 2018 6:56 pm

Sandtrap wrote:
Sat Apr 07, 2018 6:21 pm
You say, "per bond" and the question was on "brokered CD's". Why did you mention "per bond"?
You mention $1 per "bond". I thought we were addressing CD's?
I'm getting getting the two confused maybe.
Sorry--confused Doc too. Hopefully reply to Doc cleared it up.
What do you mean by "closer to settlement" to buy new issue CD's?
New issue might first be offered like two weeks before settlement, so if you place an order when it first comes out, you might have to wait as much as two weeks for the trade to settle. In the meantime your money is sitting in a money market fund earning less. During the time before the new issue comes out and when it settles, a higher-yielding new issue might come out, or you might be able to beat the new issue on secondary market at some point before the new issue is no longer offered (two days or more before settlement). Secondary market trades settle in two business days (T+2), so I earn more if I can get same or higher yield starting a week or two sooner (unless yields increase before new issue settles).

Until last couple of weeks, more than one bank might have same highest new-issue yield, but in last couple of weeks, Morgan Stanley Bank (two versions) has been only bank offering the highest 2-year and 3-year yields. Also, seemed like best 2-year and 3-year yields were increasing 5 bps per week or so, but not for last couple of weeks. Makes sense, since 2-year and 3-year Treasuries have pulled back a bit since the highs on March 20.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Sandtrap » Sat Apr 07, 2018 9:47 pm

Kevin M wrote:
Sat Apr 07, 2018 6:32 pm
Doc wrote:
Sat Apr 07, 2018 4:53 pm
Kevin M wrote:
Sat Apr 07, 2018 4:28 pm
Was answering a question about CDs.
Secondary brokered CDs: $1 or $2 per bond at Vanguard, $1 at Fidelity.
New issue CDs: no commission at either.
Treasuries, auction or secondary: no commission at either.
I thought that's what you meant but then I read:
Kevin M wrote:
Sat Apr 07, 2018 2:05 pm
you will pay $2 per bond in commission on secondary market
and decided you were not talking about CD's.

So you are paying $1 or $2 per $1000 face value for the CD is that correct? That's a little higher than Treasuries but not a deal breaker.
Sorry, using "bond" in the generic sense. Pricing is same for secondary munis, for example.

At both Vanguard and Fidelity, quantity of 1 = $1,000 face, so yes, $1 or $2 per $1,000 face for secondary CDs, corporates, munis, etc. at Vanguard, and $1 for everyone at Fidelity.

Your commission level at Vanguard can make the difference between whether or not a secondary CD deal is better than new issue or not. Actual recent example: I bought a 3-year CD on secondary at net yield of 2.822% at $1 commission, so a couple bps more than the new-issue 3-year at 2.80%, and it settled in 2 business days instead of more than a week for new issue. But at $2 commission, net yield was 2.788%, so a bit less than the new issue.

This was one of the smaller premiums I've gotten for secondary CD at $1 commission, but haven't seen them much above 7 bps or so lately, unless you extend maturity at bit. For example, got 2.897% net for a 37.1 month CD at Fidelity a couple of days ago.

But like you say, not a big deal.

With Treasuries (no commission) the issue is more the larger spreads for smaller quantities on secondary market, while smaller investors get the same yield as institutional investors at auction (which of course you already know).

Kevin
So If I purchase 500 lots at 1000k face at $1 fee each = total $500 fee?

As a Flagship Select customer, is this free?
j

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by CWRadio » Sun Apr 08, 2018 10:19 am

Kevin M thank you for sharing all your knowledge on CDs.
Please think about a article on what you know what CDs, buying, selling, bond funds etc. Paul

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by EvelynTroy » Sun Apr 08, 2018 10:31 am

CWRadio wrote:
Sun Apr 08, 2018 10:19 am
Kevin M thank you for sharing all your knowledge on CDs.
Please think about a article on what you know what CDs, buying, selling, bond funds etc. Paul
Here, here - KevinM is a treasure.
I hope Kevin is thinking of writing a book on fixed income investing.

Kevin does have a nice blog, aptly named http://www.kevinoninvesting.com/
a nice multi-part series on bond basics among other things.

Evelyn

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Apr 08, 2018 11:23 am

Sandtrap wrote:
Sat Apr 07, 2018 9:47 pm
So If I purchase 500 lots at 1000k face at $1 fee each = total $500 fee?

As a Flagship Select customer, is this free?
j
As Voyager Select ($500K in Vanguard assets), Flagship ($1M), or Flagship Select ($5M) you pay $1 per bond/CD ($1,000 face), but maximum commission is $250 for a single trade regardless of whether you're paying $1 or $2 commission. So in your example commission would be $250.

So with $2 commission, for those with less than $500K in Vanguard assets, per bond/CD price starts dropping once you hit 125 ($125,000 face), and once you hit 250 price is same as for someone paying $1 commission.

https://investor.vanguard.com/investing ... ommissions

Note that CDs and individual bonds aren't counted as Vanguard assets, so don't count in determining your qualification for different status levels.

https://investor.vanguard.com/investing ... s/flagship

See the link about 2/3 down the page titled "*See what Vanguard assets qualify for these services".

Not relevant to you specifically, since you're already Flagship Select, although I guess if you moved too much out of Vanguard bond funds into CDs, for example, your status could be downgraded.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Doc » Sun Apr 08, 2018 11:28 am

I don't like the news out of DC so I'm thinking of moving some intermediate corporates to short Treasuries, JIC.

So I looked at what was available http://www.wsj.com/mdc/public/page/2_30 ... nav_2_3000

The on the run 2 year note Friday had an ask of 2.298%. With state IT at say 6% that compares to a CD at 2.44.

A CD at 2.55 or 2.60 doesn't look very attractive since I will likely not hold to maturity.

Thoughts?
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Apr 08, 2018 12:21 pm

Doc wrote:
Sun Apr 08, 2018 11:28 am
I don't like the news out of DC so I'm thinking of moving some intermediate corporates to short Treasuries, JIC.

So I looked at what was available http://www.wsj.com/mdc/public/page/2_30 ... nav_2_3000

The on the run 2 year note Friday had an ask of 2.298%. With state IT at say 6% that compares to a CD at 2.44.

A CD at 2.55 or 2.60 doesn't look very attractive since I will likely not hold to maturity.

Thoughts?
Yes, as I've said, in taxable with state income tax Treasuries can be competitive with the best brokered CDs.

I have a spreadsheet that just pulls the Treasury, CD and muni yields from the Fidelity yield summary web page, and I see 2.30% for the 2-year Treasury, so close to your figure. Note though that these quotes are for at least quantities of 100, and possibly for maturities a little longer than indicated. For example, the 2-year quote, actually 2.309%, is for minimum quantity of 200 ($200,000 face) with maturity of 4/30/2020. There is no actual 2-year Treasury available--the closest matures 4/15/2020, and for a minimum quantity of 10 yield is 2.267%, so a few bps less, but same ballpark.

At my expected marginal tax rates of 28% federal and 8% state, not itemizing deductions, TEY of the 2-year Treasury using the 2.30% yield is 2.58%, so considering the superior liquidity, I would prefer this to a 2-year CD at 2.60%. True even if I did expect to hold to maturity (which I do).

However, the Fidelity page also shows a 2-year AAA muni at 1.95%, which for me is a TEY of 2.76%, and a 2-year AA muni at 2.04% = TEY of 2.89%. In general, I'm comfortable with AA munis out to two or even three years. However, you have to dig deeper with munis, since the highest yields shown on the summary page can be for munis with features I don't want, like extraordinary calls. In this particular case, the AA muni at 2.04% looks fine: call-protected, sinking-fund protected, and a GO of MI.

And unlike with Treasuries, best muni deals often are for smallest quantities. In the case of the 2-year MI muni, quantity available is 10, with minimum quantity 5. This is good for investors looking to build a ladder of munis with say low hundreds of thousands of dollars, since you can get reasonable diversification with that amount.

Of course you want to stick with Treasuries if you're hoping for negative correlation with equities in the next big downturn, due to the much higher liquidity. Munis are not liquid, bid/ask spreads can be high, and there are likely to be no active bid quotes for your munis, so you have to request bids.

I recently built a monthly ladder in taxable accounts of mostly munis, but also some Treasuries and CDs, out to about three years, with the intention of using proceeds of maturing munis (plus coupons) to partially fund residual living expenses, and then roll the remainder into whatever looks good at the time. So my purpose is more of a liability matching ladder than liquidity and possible negative correlation to equities.

It's in tax-advantaged (IRA) accounts that I'm currently favoring the brokered CDs.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by aaronl » Sun Apr 08, 2018 12:57 pm

Kevin M wrote:
Sun Apr 08, 2018 12:21 pm
However, the Fidelity page also shows a 2-year AAA muni at 1.95%, which for me is a TEY of 2.76%, and a 2-year AA muni at 2.04% = TEY of 2.89%. In general, I'm comfortable with AA munis out to two or even three years. However, you have to dig deeper with munis, since the highest yields shown on the summary page can be for munis with features I don't want, like extraordinary calls. In this particular case, the AA muni at 2.04% looks fine: call-protected, sinking-fund protected, and a GO of MI.
I respect the attention to detail that goes with buying individual munis, but the relative illiquidity seems like a big drawback for most people. Unless there's a high degree of certainty about holding to maturity, it seems to me like VMLUX (Vanguard Limited-Term Tax-Exempt) is a better choice. The SEC yield is 1.96%, 66% of its holdings are at least AA, and it's much more diversified and liquid than an individual bond (or a small basket of them).

One of the drawbacks, which I believe you've mentioned before, is that with this mutual fund, investors have to pay state taxes even on bonds from their own states. This is unfortuante for me as a CA investor. I considered using a state-specific fund, but there don't seem to be good short-term CA-specific funds. I considered FCSTX (Fidelity California Limited Term Tax-Free Bond), but the Vanguard national fund seems to give me a better TEY along with higher credit quality and lower duration.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Doc » Sun Apr 08, 2018 1:34 pm

Kevin M wrote:
Sun Apr 08, 2018 12:21 pm
There is no actual 2-year Treasury available--the closest matures 4/15/2020, and for a minimum quantity of 10 yield is 2.267%, so a few bps less, but same ballpark.
Picky, picky. US Treasury 2.25% 03/31/2020 9128284C1. OK I'm off by 1 day if you take next business day but you are off by 2 days if you use the last business day. :D
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Apr 08, 2018 1:49 pm

aaronl wrote:
Sun Apr 08, 2018 12:57 pm
I respect the attention to detail that goes with buying individual munis, but the relative illiquidity seems like a big drawback for most people. Unless there's a high degree of certainty about holding to maturity, it seems to me like VMLUX (Vanguard Limited-Term Tax-Exempt) is a better choice. The SEC yield is 1.96%, 66% of its holdings are at least AA, and it's much more diversified and liquid than an individual bond (or a small basket of them).
Pretty much agree, and I do hold some VMLUX, but much less than is in my taxable ladder of munis, Treasuries, and CDs.

I have plenty of liquidity, and with rungs of the ladder maturing monthly starting in a few months, I'll have more cash coming in than expected residual living expenses. I still have a chunk in Ally no-penalty CDs at 1.75%, which are now just barely above Prime MM yield, awaiting more certainty in my federal tax bill; this is an example of maintaining the liquidity I need.

As an aside, TEY of CA muni money market for me now is 2.02% (SEC yield 1.31%). So why not cash out the no-penalty CDs and move it to CA muni MM? Because the MM fund yield was similarly high in December, but then plunged to levels where it was no longer attractive. But since Prime MM yield has just been continually increasing, and is now close to the no-penalty CD yield, I won't hesitate to break the CDs once my final tax bill is known, then move the excess into the CA MM fund, and then move it to Prime MM fund if the CA MM fund yield declines again. Some of the excess also probably will be used to buy more munis.

With respect to the yields and quality, my ladder yield matches if not beats VMLUX, is 100% AA or higher, and the duration is lower. Sure, a fund with 4,000 or more bonds is more diversified, but IMO, you don't need much diversification with AA/AAA munis, especially with terms of three years or less. The historical default rates for such munis is pretty close to 0% (I think it is 0% for AAA). This is the same argument, although admittedly not quite as strong, as why you don't need the diversification of a fund for Treasuries.
One of the drawbacks, which I believe you've mentioned before, is that with this mutual fund, investors have to pay state taxes even on bonds from their own states. This is unfortuante for me as a CA investor.
Exactly. And another problem is that you're buying non-CA munis from other high tax states, like NY, that are priced for residents of those states, so you are overpaying for them. According to most recent annual/semi-annual report, NY comprises largest holdings of the fund by state, at 14% (with CA at 9%), and other high-tax states also are in the top 10. Less than 2% of my munis/Treasuries are in a single NY muni in my ladder--they almost never even made it through my criteria screens.

Interestingly, the highest TEYs often were for non-CA munis, so CA munis only comprise about 18% of my ladder. My largest holding by state is TX at 20%, as these had the highest AAA yields, and when I started building the ladder I was sticking to AAA. These figures include Treasuries, which comprise 8% of the ladder. For some reason, the CA munis seemed to offer the most competitive TEYs at the very short end of the ladder, like less than 1-year maturity, and some of these are AAA.

This brings up another thing I like about constructing a ladder from individual securities: I can use different types of securities that offer the best TEYs in different ranges of the yield curve (e.g., Treasuries at shorter durations). I can also restrict maturities to the steepest portions of the yield curve, which currently is less than three years for munis and less than one year for Treasuries.
I considered using a state-specific fund, but there don't seem to be good short-term CA-specific funds. I considered FCSTX (Fidelity California Limited Term Tax-Free Bond), but the Vanguard national fund seems to give me a better TEY along with higher credit quality and lower duration.
Makes sense. This is consistent with my observation that non-CA munis sometimes provide higher TEYs for me, but also, most Fidelity bond fund expense ratios are higher than comparable Vanguard funds. ER on FCSTX is 0.47%, compared to 0.09% for VMLUX; that's a significant hurdle to overcome, which is why I generally prefer Vanguard for bond funds.

I continue to hold my CA intermediate-term and long-term funds, but am not adding to them (yet).

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Apr 08, 2018 2:05 pm

Doc wrote:
Sun Apr 08, 2018 1:34 pm
Kevin M wrote:
Sun Apr 08, 2018 12:21 pm
There is no actual 2-year Treasury available--the closest matures 4/15/2020, and for a minimum quantity of 10 yield is 2.267%, so a few bps less, but same ballpark.
Picky, picky. US Treasury 2.25% 03/31/2020 9128284C1. OK I'm off by 1 day if you take next business day but you are off by 2 days if you use the last business day. :D
Yeah, I saw a few maturing 3/31/2020 too, but chose the one that had the higher yield, and that was closer to your quote. Also, the new-issue 2-year CD available settles 4/12, so the 4/15 Treasury probably is a better comparison.

Fidelity shows 2.294% for minimum quantity 200 for a 3/31/2020 issue, CUSIP 912828J84, 2.268% for min qty 25, and 2.263% for min qty 10.

For your CUSIP, 9128284C1, I see 2.258% for min qty 500, 2.242% for 25, and 2.234% for 10. Coupon is higher, so duration is lower, which I guess explains the slightly lower yield on this one.

Of course market is closed, so as Fidelity website says, these quotes are for modeling purposes only.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Stormbringer » Sun Apr 08, 2018 2:24 pm

Kevin M wrote:
Thu Apr 05, 2018 11:47 am
Yesterday Fidelity had the same Morgan Stanley CDs at 2.60%, but not now. Between the two MS banks VG has more than 23,000 available (well, now down to a little more than 20,000 since I started writing this). I guess Fidelity already sold its allotment, and it looks like Vanguard may sell out today.
Schwab is offering these as well:

MORGAN STANLEY PRIVA 2.6% CD 04/13/2020
Morgan Stanley Bk NA 2.6% CD 04/13/2020

It wasn't that long ago that 2.6% was 5-year money.

EDIT: They also have a 3-year CD @ 2.8%. That seems to compare favorably to the intermediate bond fund (SCHZ) which has an SEC yield of 2.66% and a 5.87 year effective duration.
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by tuffy7222 » Sun Apr 08, 2018 2:48 pm

To you (Morass) CD lovers....Ya Can't beat Ally for the best rates
whether CD's or savings accounts. :happy

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by tuffy7222 » Sun Apr 08, 2018 3:33 pm

BUMP...Total important as where to invest in CD's at the best banks which is ALLY :!:

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Apr 08, 2018 3:49 pm

tuffy7222 wrote:
Sun Apr 08, 2018 2:48 pm
To you (Morass) CD lovers....Ya Can't beat Ally for the best rates
whether CD's or savings accounts. :happy
Wrong! I love Ally as a hub bank, and occasionally they've come out with a good deal, like the no-penalty 11-month at 1.75%, which at the time was a great deal (down to 1.50% now, so no good at all), but generally neither their savings rates nor CD rates have been very competitive in recent years.

Ally 2-year offering is a raise your rate at CD 2.00%. With the 2-year brokered yield at 2.60%, the raise your rate feature is not very valuable, especially since it only applies to Ally rates. You'd have to have Ally's raise your rate 2-year rate increase from 2.00% to 3.20% after one year to match the 2-year brokered CD at 2.60%. Possible, sure. Likely, I don't think so.

The 3-year offering is a standard CD at max rate of 2.10% for $25K or more (and 1.85% for less than $5K), so nowhere near the 3-year brokered yield of 2.80%. Ally does have one of the lowest early withdrawal penalties (EWPs) of five month of interest, but at these relatively short terms that's not particularly valuable at such low rates. You can run some scenarios, but you are placing a big bet on Ally's rates increasing by a huge amount if you think you'll earn more starting at 2.10% or less, doing an early withdrawal at some point in the next couple of years, and investing at a rate high enough to beat the 2.80% of the brokered CD.

Ally savings rate is only 1.45%, which you now can easily beat in Prime money market at 1.72%, or in a Popular Direct savings account at 2.00%. Or for me, CA muni money market at TEY of 2.02%.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Doc » Sun Apr 08, 2018 4:58 pm

In replying to me Kevin wrote.
Kevin M wrote:
Sun Apr 08, 2018 2:05 pm
Yeah, I saw a few maturing 3/31/2020 too, but chose the one that had the higher yield, and that was closer to your quote. Also, the new-issue 2-year CD available settles 4/12, so the 4/15 Treasury probably is a better comparison.
I thought I choose the one closest to par so I didn't have to deal with amortizing the premium or accruing the market discount. De minimus is sometimes a good thing. Especially around the 15th of April each year.
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by bayview » Sun Apr 08, 2018 6:06 pm

Kevin M wrote:
Sat Apr 07, 2018 6:32 pm
Doc wrote:
Sat Apr 07, 2018 4:53 pm
Kevin M wrote:
Sat Apr 07, 2018 4:28 pm
Was answering a question about CDs.
Secondary brokered CDs: $1 or $2 per bond at Vanguard, $1 at Fidelity.
New issue CDs: no commission at either.
Treasuries, auction or secondary: no commission at either.
I thought that's what you meant but then I read:
Kevin M wrote:
Sat Apr 07, 2018 2:05 pm
you will pay $2 per bond in commission on secondary market
and decided you were not talking about CD's.

So you are paying $1 or $2 per $1000 face value for the CD is that correct? That's a little higher than Treasuries but not a deal breaker.
Sorry, using "bond" in the generic sense. Pricing is same for secondary munis, for example...

Kevin
It's not just you. I see that on Vanguard's Asset mix tab, DH's fixed income (aka nearly everything) is weirdly split among bonds and short-term reserves. I can't figure out what is showing where, as there are orders in for auction CDs that haven't yet been executed, so there's some limbo going on. But other than orders for 3-month and 6-month Treasuries, everything else is money market (surely that is short-term reserves), CD's, or moving from MM to CD's.

Not the end of the world, but if I used VG's Portfolio Watch to estimate potential risk and return, it would be kind of maddening to know that some portion of the CD's were being treated as if they were bonds.

Vanguard is like a favorite relative that you love but sometimes want to strangle. :oops:
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Kevin M
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Apr 08, 2018 6:59 pm

Brokered CDs are bonds in the sense that standard bond formulas apply to them as well as to other fixed-income securities. In other words, the relationship between yield and price is determined by the same formulas, as is duration, for example. In the spreadsheet I use to calculate net yields (after commission, if any), I use the same spreadsheet bond YIELD function for CDs, Treasuries and munis.

By contrast, direct CDs are a bit of a different animal, since there is no secondary market, and therefore no market price or yield. If you want to consider the bank the secondary market, since you can "sell" your CD by doing an early withdrawal, then bond formulas don't apply at all. The liquidation value is simply established by the CD agreement between you and the bank, and this value has nothing to do with any yield you can find on any secondary market.

Of course there are differences between the different types of brokered fixed-income securities, and distinguishing between them is shorthand for summarizing those differences. CDs are FDIC insured as long as you stay within the limits, Treasuries are backed by the US government without limit, munis are backed by various things, Treasuries have much lower bid/ask spreads, munis can be just federally tax exempt or also state tax exempt, Treasuries are state tax exempt, you will pay a commission for secondary market CDS and munis, but not Treasuries, etc., etc. ...

In terms of the Vanguard differentiation between short-term reserves and bonds (or whatever), I think that's somewhat of an artificial division, especially with the wider variety of fixed-income instruments available to retail investors. I prefer to just lump it all into "fixed income", and differentiate by term risk, credit risk, liquidity, and whatever else is important to me. I don't really care what someone else calls it.

I'll agree that there's a distinction between no term risk and a some term risk, so if by "short term reserves" or "cash" someone means fixed income with no term risk (and no little or no credit risk), I'm fine with that. But I think institutional investors define "cash" as fixed income with little to no credit risk and less than one year to maturity, and I don't see anything special about one-year maturity.

I think Vanguard defines short-term reserves as money market funds. I don't know if they even include net credit debit for unsettled trades in Portfolio Watch (I don't see it). All other fixed income is bonds or "bonds and bond funds". I basically agree with this given my dividing line between no term risk and some term risk, if you want to draw that distinction.

Kevin
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Riley15 » Sun Apr 08, 2018 7:00 pm

Kevin M wrote:
Fri Apr 06, 2018 4:02 pm

A common guideline is that you want a minimum of 20 basis points per year of extra maturity. If you go by that, the 2-year at 2.60% is worth it to pick up 30 basis points, as this comes out to about 51 bps per year of extra maturity, so well above 20.

Kevin
Where did you obtain this guideline of 20 bps per extra year of maturity? Not saying it's unreasonable, but curious to where it comes from. There must be some history behind it.

I am guessing this would be useful if the fed rate is constant during that time. Assuming the fed will raise interest rate once or twice in a year, maybe we can add another factor to this for further rate comparisons?
Last edited by Riley15 on Sun Apr 08, 2018 7:05 pm, edited 2 times in total.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by bayview » Sun Apr 08, 2018 7:01 pm

Kevin M wrote:
Sun Apr 08, 2018 6:59 pm
Brokered CDs are bonds in the sense that standard bond formulas apply to them as well as to other fixed-income securities. In other words, the relationship between yield and price is determined by the same formulas, as is duration, for example. In the spreadsheet I use to calculate net yields (after commission, if any), I use the same spreadsheet bond YIELD function for CDs, Treasuries and munis.

By contrast, direct CDs are a bit of a different animal, since there is no secondary market, and therefore no market price or yield. If you want to consider the bank the secondary market, since you can "sell" your CD by doing an early withdrawal, then bond formulas don't apply at all. The liquidation value is simply established by the CD agreement between you and the bank, and this value has nothing to do with any yield you can find on any secondary market.

Of course there are differences between the different types of brokered fixed-income securities, and distinguishing between them is shorthand for summarizing those differences. CDs are FDIC insured as long as you stay within the limits, Treasuries are backed by the US government without limit, munis are backed by various things, Treasuries have much lower bid/ask spreads, munis can be just federally tax exempt or also state tax exempt, Treasuries are state tax exempt, you will pay a commission for secondary market CDS and munis, but not Treasuries, etc., etc. ...

In terms of the Vanguard differentiation between short-term reserves and bonds (or whatever), I think that's somewhat of an artificial division, especially with the wider variety of fixed-income instruments available to retail investors. I prefer to just lump it all into "fixed income", and differentiate by term risk, credit risk, liquidity, and whatever else is important to me. I don't really care what someone else calls it.

I'll agree that there's a distinction between no term risk and a some term risk, so if by "short term reserves" or "cash" someone means fixed income with no term risk (and no little or no credit risk), I'm fine with that. But I think institutional investors define "cash" as fixed income with little to no credit risk and less than one year to maturity, and I don't see anything special about one-year maturity.

I think Vanguard defines short-term reserves as money market funds. I don't know if they even include net credit debit for unsettled trades in Portfolio Watch (I don't see it). All other fixed income is bonds or "bonds and bond funds". I basically agree with this given my dividing line between no term risk and some term risk, if you want to draw that distinction.

Kevin
OK, that makes sense. :beer
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by radiowave » Sun Apr 08, 2018 7:27 pm

Kevin M wrote:
Sun Apr 08, 2018 3:49 pm
tuffy7222 wrote:
Sun Apr 08, 2018 2:48 pm
To you (Morass) CD lovers....Ya Can't beat Ally for the best rates
whether CD's or savings accounts. :happy
Wrong! I love Ally as a hub bank, and occasionally they've come out with a good deal, like the no-penalty 11-month at 1.75%, which at the time was a great deal (down to 1.50% now, so no good at all), but generally neither their savings rates nor CD rates have been very competitive in recent years.

Ally 2-year offering is a raise your rate at CD 2.00%. With the 2-year brokered yield at 2.60%, the raise your rate feature is not very valuable, especially since it only applies to Ally rates. You'd have to have Ally's raise your rate 2-year rate increase from 2.00% to 3.20% after one year to match the 2-year brokered CD at 2.60%. Possible, sure. Likely, I don't think so.

The 3-year offering is a standard CD at max rate of 2.10% for $25K or more (and 1.85% for less than $5K), so nowhere near the 3-year brokered yield of 2.80%. Ally does have one of the lowest early withdrawal penalties (EWPs) of five month of interest, but at these relatively short terms that's not particularly valuable at such low rates. You can run some scenarios, but you are placing a big bet on Ally's rates increasing by a huge amount if you think you'll earn more starting at 2.10% or less, doing an early withdrawal at some point in the next couple of years, and investing at a rate high enough to beat the 2.80% of the brokered CD.

Ally savings rate is only 1.45%, which you now can easily beat in Prime money market at 1.72%, or in a Popular Direct savings account at 2.00%. Or for me, CA muni money market at TEY of 2.02%.

Kevin
Kevin, I really like the Ally online feature of being able to directly change where CD funds go at maturity, e.g. savings, checking, another account, and specifying how interest is handled and can do that anytime the CD is active if I change my mind. Is there any other bank that has that same online capability? I get paranoid with CDs that are automatically rolled over unless I contact the bank within the narrow time window at maturity.
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Apr 08, 2018 8:36 pm

Riley15 wrote:
Sun Apr 08, 2018 7:00 pm
Where did you obtain this guideline of 20 bps per extra year of maturity? Not saying it's unreasonable, but curious to where it comes from. There must be some history behind it.
It's the guideline used by well-respected Boglehead author Larry Swedroe's firm. Larry's views tend to be as firmly grounded in academic research as anyone I know. In a PM discussion Doc and I have been having, he mentioned a reference by Larry to a Fama and Bliss paper, but neither of us has researched it.

If you get a 20 bps yield increase for extending maturity by one year, then you will earn a positive one-year capital return as long as the n-1 year yield doesn't increase by more than 20 bps in one year. I assume the guideline is based on the historical movement of yields, and provides a balance between the positive expected capital return with a positively-sloped yield curve, assumed to remain unchanged, and the risk that the yield curve moves against you, and you end up with a negative capital return component.

I started doing a little analysis of this by using FRED to look at the historical one-year change in yield of the 2-year Treasury. I'm looking at that maturity since I'm only going out to 3-year maturity, so the 2-year yield will determine the one-year capital return component of a 3-year security bought today. There are certainly many examples of the 2-year yield increasing by more than 20 bps in a year, but I haven't yet proceeded with any numerical analysis. Just looking at the last year, the 2-year yield increased from about 1.3% in September 2017 to about 2.3% recently, so about 100 bps increase in less than 8 months. In this case, the yield curve moved against us, and a 3-year Treasury bought one year ago had a negative capital return.
I am guessing this would be useful if the fed rate is constant during that time. Assuming the fed will raise interest rate once or twice in a year, maybe we can add another factor to this for further rate comparisons?
The Fed funds rate (FFR) is not the relevant rate, as it is the shortest-term rate (overnight), and isn't necessarily related to longer terms, especially if looking at yield changes over a year or two. Only the shortest-term Treasuries respond closely to changes in FFR. Longer term, short-term and long-term yields tend to move together.

What matters is how the yield changes at the terminal point of the yield curve segment you're considering. In the example above, I'm looking at the 2-3 year segment, and 2-year yield one year from now is the terminal point. If buy a 5-year Treasury with a 3-year holding period, so plan to sell in three years, the 2-year yield three years from now is the relevant yield.

A common assumption is a static yield curve in determining expected return, and with that assumption, it's straightforward to calculate the expected return as the sum of the coupon rate and the capital return you'd get as the security "rolls down" the yield curve over the period of interest. Of course the realized return is likely to be very different, as we've seen lately.

Kevin
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Apr 09, 2018 10:37 am

radiowave wrote:
Sun Apr 08, 2018 7:27 pm
Kevin, I really like the Ally online feature of being able to directly change where CD funds go at maturity, e.g. savings, checking, another account, and specifying how interest is handled and can do that anytime the CD is active if I change my mind. Is there any other bank that has that same online capability? I get paranoid with CDs that are automatically rolled over unless I contact the bank within the narrow time window at maturity.
Yes, that is great functionality at Ally, and is one example of a broad range of nice features Ally has, which is why I like it as my main bank. You can also do early withdrawals online. Last time I checked, this was only for taxable accounts, so not available for IRA CDs.

PenFed has at least a subset of this functionality, but like Ally, PenFed has not had competitive CD rates for a few years. Most banks and credit unions I've used don't have this functionality, but at some, you can provide an instruction any time before maturity not to roll over the CD, but to deposit proceeds into your savings or share account.

Although these are nice features, they're not enough of an inducement for me to accept the uncompetitive CD rates. Direct CDs may not be a good choice if you are unwilling to monitor maturities, and be willing to move to another bank or credit union if necessary to get a competitive rate when your CD matures.

I enter maturity dates in my calendar, and contact the bank or credit union in advance to instruct them not to roll over a CD if their rates aren't competitive. This usually works, but if not, I contact them again on the day of maturity or as soon as they allow.

With IRA CDs, you can do an IRA transfer with the instruction to transfer the proceeds of the CD at maturity. This is what I've been doing lately, and I have a transfer form ready to drop of at the local Fidelity office today. I still notify the current custodian that I don't want the CD rolled over, in case there's some delay or screwup in the transfer.

Of course with brokered CDs, which is what we're mostly discussing in this thread, CDs don't roll over, so the particular issue you mention is not a concern.

Kevin
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