Timing CD Buys

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Arby
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Timing CD Buys

Post by Arby »

Most expect that today the Fed will raise 25 basis points and issue of doveish statement.

But what if there is a surprise,let's say no rate hike?

ETFs react instantly to news and mutual funds are priced at the end of the day.

But it seems brokered CDs are a good opportunity to get an edge.

I think there are two ways to play this. One is to put in a buy order for a brokered CD now, and simply cancel it if there is no surprise. Or one can just wait and there will still be brokered CDs out there at the old rates at least until the end of the day, probably longer.

Thoughts?
aristotelian
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Re: Timing CD Buys

Post by aristotelian »

I posted recently to see if there was a site that monitors the spread between CDs and Treasuries. I noticed that as Treasury yields have dropped recently, CDs have held level. I think they are probably a good buy right now but that spread would be the indicator to look at.
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jeffyscott
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Re: Timing CD Buys

Post by jeffyscott »

Arby wrote: Wed Dec 19, 2018 1:37 amOne is to put in a buy order for a brokered CD now, and simply cancel it if there is no surprise.
Is it possible to do that? In my limited experience of buying brokered CDs over the last 6 months, the trades are executed as soon as I put in the order. I have mostly done secondaries as can usually find better deals that way. Maybe it's different with a new issue as those can be sold far ahead of the settlement date?

In some cases, there has been a delay before they are able to execute the trade, but I had no control once submitted (I suppose I could've canceled before they executed but, at most, this was a window of an hour or so). In other cases, the trade can not be executed and it is canceled by the broker, again I had no control. These scenarios were for secondaries and have happened to me for CDs where there was a very small quantity available.
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dm200
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Re: Timing CD Buys

Post by dm200 »

jeffyscott wrote: Wed Dec 19, 2018 7:38 am
Arby wrote: Wed Dec 19, 2018 1:37 amOne is to put in a buy order for a brokered CD now, and simply cancel it if there is no surprise.
Is it possible to do that? In my limited experience of buying brokered CDs over the last 6 months, the trades are executed as soon as I put in the order. I have mostly done secondaries as can usually find better deals that way. Maybe it's different with a new issue as those can be sold far ahead of the settlement date?

In some cases, there has been a delay before they are able to execute the trade, but I had no control once submitted (I suppose I could've canceled before they executed but, at most, this was a window of an hour or so). In other cases, the trade can not be executed and it is canceled by the broker, again I had no control. These scenarios were for secondaries and have happened to me for CDs where there was a very small quantity available.
Barring something very unusual, you cannot cancel an order at Vanguard.
latak215
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Re: Timing CD Buys

Post by latak215 »

I wonder how much you loose if yoh sell a cd. Are there tips to sell a cd? thanks in advance.
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Arby
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Re: Timing CD Buys

Post by Arby »

You can cancel new issue CD orders at Fidelity but it is unclear exactly how long you have to cancel before the Settlement date. It seems to vary from bank to bank. In my experience Comenity Bank orders seem to lock in earlier than some other banks.
Last edited by Arby on Wed Dec 19, 2018 11:27 am, edited 1 time in total.
Scooter57
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Re: Timing CD Buys

Post by Scooter57 »

If rates drop you can may be able to sell your CD on the secondary market for more than you paid for it, though you will have to pay a hefty commission. If they rise and you sell a brokered CD you lose money and pay the commission.

I wouldn't buy any brokered CD I didn't plan on holding for the entire term.

With Credit Union and Bank CDs there is an early withdrawal penalty which you will pay if you break them and take your money out before the end of the term. Many are 6 months of interest. Some are considerably higher. You must carefully examine the terms of the early withdrawal penalty before buying any longer term CD.

If rates rise, you may still come out ahead when you break a CD and reinvest at a higher rate, though the higher the initial yield of the CD the less likely this is. When rates were around 2%, it wasn't a huge issue. At 4% or more it becomes one unless rates are soaring.
fsrph
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Re: Timing CD Buys

Post by fsrph »

aristotelian wrote: Wed Dec 19, 2018 5:46 am I posted recently to see if there was a site that monitors the spread between CDs and Treasuries. I noticed that as Treasury yields have dropped recently, CDs have held level. I think they are probably a good buy right now but that spread would be the indicator to look at.
Maybe this will help. Vanguard lists current yields on brokered CDs and Treasuries on the same page for comparison.
https://personal.vanguard.com/us/FixedIncomeHome

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie
aristotelian
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Re: Timing CD Buys

Post by aristotelian »

fsrph wrote: Wed Dec 19, 2018 11:46 am
aristotelian wrote: Wed Dec 19, 2018 5:46 am I posted recently to see if there was a site that monitors the spread between CDs and Treasuries. I noticed that as Treasury yields have dropped recently, CDs have held level. I think they are probably a good buy right now but that spread would be the indicator to look at.
Maybe this will help. Vanguard lists current yields on brokered CDs and Treasuries on the same page for comparison.
https://personal.vanguard.com/us/FixedIncomeHome

Francis
Yeah, my question was whether it is possible to see how the current spread compares historically. I don't think there's a way to do that.
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Arby
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Re: Timing CD Buys

Post by Arby »

aristotelian wrote: Wed Dec 19, 2018 12:34 pm Yeah, my question was whether it is possible to see how the current spread compares historically. I don't think there's a way to do that.
https://www.bankrate.com/banking/cds/hi ... 1984-2016/

https://www.treasury.gov/resource-cente ... &year=2018
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jeffyscott
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Re: Timing CD Buys

Post by jeffyscott »

Arby wrote: Wed Dec 19, 2018 1:05 pm
aristotelian wrote: Wed Dec 19, 2018 12:34 pm Yeah, my question was whether it is possible to see how the current spread compares historically. I don't think there's a way to do that.
https://www.bankrate.com/banking/cds/hi ... 1984-2016/

https://www.treasury.gov/resource-cente ... &year=2018

The problem there is that bankrate is showing the national average rate, which is horribly low. Looking at that currently:

Image

would give you huge negative spreads for CDs vs. treasuries. Current reality is one can easily and conveniently get much better rates than those averages with brokered CDs (or less easily and less conveniently by shopping around to different banks).
Topic Author
Arby
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Re: Timing CD Buys

Post by Arby »

On the Fidelity website, you can look at CDs on offered on the secondary market and find out their original issue date and coupon rate.

Of course, this is by no means an easy to use reference chart but it is a crude tool that can be used in absence of a well laid out chart like the Treasury website.
OnTrack
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Re: Timing CD Buys

Post by OnTrack »

I wouldn't count on an 0.25% fed funds and/or discount rate change to necessary change CD rates except for very short term. Not sure if the suggested strategy would be worth the effort.
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Arby
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Re: Timing CD Buys

Post by Arby »

I have never bought a CD in the secondary market.

My understanding is that at Fidelity the commission is $1 per secondary CD so purchasing let's say approx $8,000 worth of CDs would result in an $8 commission. Is this correct?

Does the yield on the Fidelity site factor in this commission or is it the yield before commission?

Is there anything I need to be aware of such as an interest payment going to the seller before the trade settles?
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jeffyscott
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Re: Timing CD Buys

Post by jeffyscott »

Arby wrote: Mon Dec 24, 2018 5:35 amMy understanding is that at Fidelity the commission is $1 per secondary CD so purchasing let's say approx $8,000 worth of CDs would result in an $8 commission. Is this correct?
Yes.
Does the yield on the Fidelity site factor in this commission or is it the yield before commission?
The list will show before commission. You, annoyingly, have to click through as if buying before you see the yield net of commission.
Is there anything I need to be aware of such as an interest payment going to the seller before the trade settles?
I believe any interest payment before settlement goes to the seller. You will pay for accrued interest when you buy. For example, if it is a semi-annual coupon and settlement is 1/2 between coupon dates, you will pay the seller 1/2 of the interest for that 6 month period.
Scooter57
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Re: Timing CD Buys

Post by Scooter57 »

From what I can see, by the time you pay the fee and buy the interest (which may be taxable if this is a taxable account) the secondary market CDs aren't paying any better than the new ones.

In addition, in a taxable account if you buy the CD for less than face value there are tax complexities that come into play when the CD matures as you have a technical profit on the price you paid. All this can be dealt with by software or an accountant but it is one more thing to deal with.
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jeffyscott
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Re: Timing CD Buys

Post by jeffyscott »

I have no idea of potential tax issues, I am only buying in tax deferred and secondaries have almost always been better deals, though it does take time to rummage through them. The rummaging is much easier on Schwab, as they show YTM net of commission right in their table of quotes. Downside of Schwab is $10 minimum commission, so have to buy $10K at a time there if looking at secondaries.

Most recent was last week, got 3.39% YTM, net of commission, with a remaining term of 3.13 years.
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Arby
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Re: Timing CD Buys

Post by Arby »

Do you guys rummage through and buy a CD priced somewhat favorably or do you submit a Bid for less than the asking price on a number of CDs and see if there are any takers?

On the Fidelity platform if you place a Bid, is it possible to have a minimum Buy of 1 or do you need to go through a rep to do that?

In placing a Bid it seems my two options are Fill or Kill, and Day orders. Without going through a rep, is there a way to have your Bid last longer than a day?
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jeffyscott
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Re: Timing CD Buys

Post by jeffyscott »

Yes, you can buy 1 on Fidelity, I have done that online. Some CD quotes do have higher minimums, though.

I just rummage and buy with fill or kill. I don't know if there is a way to submit a lower bid.
Scooter57
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Re: Timing CD Buys

Post by Scooter57 »

That does make sense in a tax advantaged account.

I wonder if now that CD rates are more favorable than they used to be we will see a more lively secondary market for CDs. In the past my impression was that they could be hard to sell and the rates were usually lower than what you could get from online banks and CUs (though the IRAs are more complicated there.)
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