Which is better CD - rates and terms?

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Kevin M
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Re: Which is better CD - rates and terms?

Post by Kevin M » Thu Oct 11, 2018 5:37 pm

JackoC wrote:
Thu Oct 11, 2018 3:40 pm
<snip>
... for all but very high stock allocations a large portion of fixed income is not realistically subject to being sold to buy stocks and there will almost always be some which is not. And for that portion, for a given maturity, the fact that treasuries show a price increase and CD's do not is irrelevant.
Agree with this and everything else you said. Have made the same point many times in other posts.

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Re: Which is better CD - rates and terms?

Post by Doc » Thu Oct 11, 2018 6:22 pm

Kevin M wrote:
Thu Oct 11, 2018 5:37 pm
JackoC wrote:
Thu Oct 11, 2018 3:40 pm
<snip>
... for all but very high stock allocations a large portion of fixed income is not realistically subject to being sold to buy stocks and there will almost always be some which is not. And for that portion, for a given maturity, the fact that treasuries show a price increase and CD's do not is irrelevant.
Agree with this and everything else you said. Have made the same point many times in other posts.

Kevin
Do a simple "what if" calculation based on your desired AA.

Example:

Say AA is 50/50.

Equities tank by 40 %.

Your $100k portfolio is now $30k equity and $50k FI. You need to sell $10k FI and buy $10k equities to rebalance. Would you rather have that $10k in bonds something that increased in price when the stock market tanked? More likely Treasuries increased and corporates decreased in price. I would want $10k to be in Treasuries.

Do your own calculation based on your own AA and what % of stock market decline to you want to assume.
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Re: Which is better CD - rates and terms?

Post by JackoC » Fri Oct 12, 2018 12:47 pm

Doc wrote:
Thu Oct 11, 2018 6:22 pm
Kevin M wrote:
Thu Oct 11, 2018 5:37 pm
JackoC wrote:
Thu Oct 11, 2018 3:40 pm
<snip>
... for all but very high stock allocations a large portion of fixed income is not realistically subject to being sold to buy stocks and there will almost always be some which is not. And for that portion, for a given maturity, the fact that treasuries show a price increase and CD's do not is irrelevant.
Agree with this and everything else you said. Have made the same point many times in other posts.

Kevin
Do a simple "what if" calculation based on your desired AA.

Example:

Say AA is 50/50.

Equities tank by 40 %.

Your $100k portfolio is now $30k equity and $50k FI. You need to sell $10k FI and buy $10k equities to rebalance. Would you rather have that $10k in bonds something that increased in price when the stock market tanked? More likely Treasuries increased and corporates decreased in price. I would want $10k to be in Treasuries.

Do your own calculation based on your own AA and what % of stock market decline to you want to assume.
The post Kevin M responded to, mine, started off with exactly that point, to reiterate my example:
"But even for a heavy stock allocation that's only a limited part of your fixed income. If for example you plan to always be 60/40 stock/bond and stocks decline 75% you'd still only have to reallocate 18 or the original 40 in bonds to come back to 60%/40% (33/22 in terms of the original amounts), assuming for simplicity bonds didn't move."

The point is the irrelevance of the price move of treasuries for the 22 of the original 40, not the relevance for the 18, which nobody disputes. Or whatever those component are based on what you assume. But keeping in mind that assuming a large sudden stock loss isn't free. That makes you keep more in treasuries when CD's might yield up to 1% more (a realistically attainable goal over the last several yrs for 5 yr CD's v 5 yr treasuries, though not at the moment and there's no gtee it will be that big in the future).

I don't think it's common for people to think they can sell CD's at a premium when rate declines for the small part of their fixed income allocation which is likely to end up getting rebalanced into stocks. It does seem common for people to think it means anything that treasuries change in price and CD's don't for the portion of fixed income unlikely or very unlikely to be rebalanced into stocks, which it doesn't.

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Re: Which is better CD - rates and terms?

Post by Doc » Fri Oct 12, 2018 2:20 pm

JackoC wrote:
Fri Oct 12, 2018 12:47 pm
I don't think it's common for people to think they can sell CD's at a premium when rate declines for the small part of their fixed income allocation which is likely to end up getting rebalanced into stocks. It does seem common for people to think it means anything that treasuries change in price and CD's don't for the portion of fixed income unlikely or very unlikely to be rebalanced into stocks, which it doesn't.
That's the point. They don't think of the price change of the portion of their FI that they will want to sell to rebalnce in an equity bear market.

Treasury prices are likely to increase and corporate prices are likely to decline in such a situation. Meanwhile direct CD's have a stable price but you have to pay an early withdrawal penalty in order to sell them in order to replenish your equities. I would guess that in such a situation brokered CD's would behave less like Treasuries and more like corporates because of limited demand.

I'm not smart enough to predict future bond prices (yields). I just model my FI portfolio on the Bloomberg Barclays Intermediate Term Index. I just break that index into it''s constituents so in the next crisis I can sell whichever bond segment has a price increase. That's probably Treasuries. I am willing to take a slightly smaller (after tax) return for that insurance .

If you know that you will never ever want to sell your FI before maturity then CD's should be part of your choices.
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Re: Which is better CD - rates and terms?

Post by Chesterfield » Fri Oct 12, 2018 10:32 pm

Hi Kevin,
Trying to learn more about "Treasury" stuff here, but will you please help me w/ these questions below:

1) Why (or in which ways) does 6 month Treasury have much better liquidity than say 7 month NWFCU CD?
2) Where & how does one buy Treasury on auction?
3) What are the pros and cons between buying Treasury at auctions vs buying Treasury Index fund?

Thank you.

Kevin M wrote:
Mon Oct 08, 2018 1:26 pm
EvelynTroy wrote:
Mon Oct 08, 2018 12:43 pm
I reread the discussion, and KevinM noted the Northwest Federal CU offer of 7 mo @ 2.50% - my CD that matured today is from NWFCU - I had requested the proceeds be mailed to me - didn't know what I wanted to do with it. Didn't even check NWFCU's offerings - maybe I can phone first thing Tues. and have the CD reinvested at the 7 mo. offer. Maybe they didn't mail it yet. Thanks KevinM for heads-up on this.
You're welcome. What about my suggestion to consider Treasuries if you pay state income tax? Do you?

Although the NWFCU 7-month CD is not attractive to me, I considered it for my mom, since I expect her state tax rate to be low if not 0% next year. However, even without the state tax exemption, the 6-month Treasury yield is about 2.4%, and I don't think 10 basis points is enough to justify not continuing to consolidate their assets in a single brokerage account, not to mention the much better liquidity of a Treasury. Of the roughly $109K or so from the CD, I entered Treasury auction orders for 40 6-month and 40 1-year Treasury bills in her brokerage account, and will leave the remainder in Prime MM to cover expected and unexpected expenses for the next few months (they have other CDs and Treasuries maturing in less than six months).

You should be able to log onto your account to see if the check has been deducted from your account yet. Even if so, maybe they can stop payment on the check.

Why did you request a check rather than do an ACH transfer to Schwab or whatever bank you'd deposit the check to?

Kevin

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Re: Which is better CD - rates and terms?

Post by drzzzzz » Sat Oct 13, 2018 9:04 am

Chesterfield wrote:
Fri Oct 12, 2018 10:32 pm
Hi Kevin,
Trying to learn more about "Treasury" stuff here, but will you please help me w/ these questions below:

1) Why (or in which ways) does 6 month Treasury have much better liquidity than say 7 month NWFCU CD?
2) Where & how does one buy Treasury on auction?
3) What are the pros and cons between buying Treasury at auctions vs buying Treasury Index fund?

Thank you.
[ quote fixed by admin LadyGeek]

Kevin has excellent advice, but I would offer that the difference over 6 or 7 months is pretty trivial and the rates are similar especially if you are comfortable with staying at NWFCU then you should consider staying with them. I have found that purchasing at auction treasury bills is very simple and easy at Vanguard (except I need to remember to transfer funds from my money market account to my settlement account for the purchase) and there are no expenses involved. As Kevin mentions, you also don't have to pay state or local taxes on the interest if that is an issue for you. I do find that Fidelity is even easier for the purchase of new at auction treasuries since they will purchase them from either a settlement or money market account (so I don't have to move any funds around) and they also have an autoroll feature so you don't need to remember to purchase again if just doing a 3 or 6 month duration treasury bill and your plan is to continue doing that.

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Re: Which is better CD - rates and terms?

Post by LadyGeek » Sat Oct 13, 2018 9:23 am

This thread is now in the Personal Finance (Not Investing) forum (bank CD).

The wiki has some background info: Comparing CDs
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Re: Which is better CD - rates and terms?

Post by Kevin M » Sat Oct 13, 2018 10:28 pm

Chesterfield wrote:
Fri Oct 12, 2018 10:32 pm
1) Why (or in which ways) does 6 month Treasury have much better liquidity than say 7 month NWFCU CD?
If you want/need to liquidate before maturity, you pay an early withdrawal penalty (EWP) on a direct CD. For longer-term CDs, like five years, the early withdrawal option can be a benefit, in that the EWP could be significantly less than the loss on a 5-year Treasury if yields increase enough, say in 2-3 years.

However, on a short-term CD, I think it's unlikely that rates would increase enough over a few months for this to be the case. And if rates decrease, you still take a loss on doing an early withdrawal from the CD. Hence, I don't consider the early withdrawal option a benefit on short-term CDs.

The bid/ask spread is very small for Treasuries, so the cost to sell is small. I haven't done any actual calculations, but I'd guess that you'd lose less on selling a 6-month Treasury before maturity if rates increase than you would in doing an early withdrawal from the 7-month CD. And if rates decrease, the Treasury will increase in value, unlike the CD. This could be useful, for example, for rebalancing into stocks.
2) Where & how does one buy Treasury on auction?
I buy them through a broker, but you also can buy them at Treasury Direct. A broker will have some sort of "trade fixed income", "trade bonds and CDs", or some similar choice in a menu. Once at one of the fixed income trading web pages, there will be an option to select Treasuries, then buy at auction or on secondary market. Selecting the buy at auction choice will show the Treasuries for which the auctions are open.

Each Treasury being auctioned will have a "buy" link next to it. Click that, enter the quantity (quantity 1 = $1,000 face value), then click through the screens to submit the buy order. You can do this any time between when the auction opens and when it closes, even on the weekend. Your order may show up in your order status screen, but at Vanguard it may not show up until the next trading day (happened to me last weekend).
3) What are the pros and cons between buying Treasury at auctions vs buying Treasury Index fund?
There are a number of differences, some of which are as follows.

A fund has expenses, so you will lose a few basis points to the expense ratio. For example, the ER for the Vanguard short-term Treasury Index fund Admiral shares is 7 basis points (0.07%). So on a 2-year Treasury in the fund with a yield of 2.85%, your net yield would be about 2.78%.

A fund is much simpler to manage. I think most forum members think the relatively small expense ratio of Vanguard bond funds (or low-cost bond ETFs from various providers) is worth it for the simplicity.

For Treasuries, the diversification of a fund is not really a benefit, but it is for bonds with credit risk, like corporates and munis.

With individual securities, you can optimize your fixed-income portfolio to your liking. For example, in an IRA, I would buy Treasuries out to 1-year maturity, but CDs from 1-year to 3-year maturity. In taxable, I might buy munis for some of a ladder (as I was doing some months ago), or I might buy Treasuries unless munis are providing a high enough yield premium. You also have more control over the maturities you own, but I don't think this is important to most people (it is to me though).

With individual securities you can use some of the proceeds of maturing securities (Treasuries, CDs, munis) to fund expenses--you don't necessarily have to sell anything before it matures. With a fund, it's easy to sell shares, but you're selling a bit of all maturities in the fund, and you may be selling after a significant price decline (significant as far as bonds go--nothing compared to stocks).

Of course the flip side of this is that you have to reinvest the proceeds of maturing securities if you don't use all proceeds for expenses. Fidelity offers an auto-roll feature, but this wouldn't work if you wanted to use some of the proceeds of maturing securities for expenses (at least I wouldn't think so--I've never used it).

I'm sure there are more differences. Others can chime in if they want.

Kevin
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Re: Which is better CD - rates and terms?

Post by jeffyscott » Sun Oct 14, 2018 12:55 pm

Kevin M wrote:
Sat Oct 13, 2018 10:28 pm
I buy them through a broker, but you also can buy them at Treasury Direct.
One potential small advantage of TD is that you can buy in increments of $100. A disadvantage is that selling early is more difficult, the instructions for doing so indicate that you must transfer them to a broker, which requires mailing a form.

https://www.treasurydirect.gov/indiv/re ... d_sell.htm

I use TD, but there is no chance I will need or want to sell early.
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Re: Which is better CD - rates and terms?

Post by JackoC » Sun Oct 14, 2018 2:07 pm

Doc wrote:
Fri Oct 12, 2018 2:20 pm
JackoC wrote:
Fri Oct 12, 2018 12:47 pm
I don't think it's common for people to think they can sell CD's at a premium when rate declines for the small part of their fixed income allocation which is likely to end up getting rebalanced into stocks. It does seem common for people to think it means anything that treasuries change in price and CD's don't for the portion of fixed income unlikely or very unlikely to be rebalanced into stocks, which it doesn't.
That's the point. They don't think of the price change of the portion of their FI that they will want to sell to rebalnce in an equity bear market.

Treasury prices are likely to increase and corporate prices are likely to decline in such a situation. Meanwhile direct CD's have a stable price but you have to pay an early withdrawal penalty in order to sell them in order to replenish your equities. I would guess that in such a situation brokered CD's would behave less like Treasuries and more like corporates because of limited demand.

I'm not smart enough to predict future bond prices (yields). I just model my FI portfolio on the Bloomberg Barclays Intermediate Term Index. I just break that index into it''s constituents so in the next crisis I can sell whichever bond segment has a price increase. That's probably Treasuries. I am willing to take a slightly smaller (after tax) return for that insurance .

If you know that you will never ever want to sell your FI before maturity then CD's should be part of your choices.
Again you seem to ignore the point I made then you repeated yourself a couple of posts ago. We both gave examples of how even a large decline in stocks results in having to sell a minority of one's FI to rebalance. IOW almost everyone fulfills the criterion you give in the last sentence. For that portion of FI that it's very unlikely one would sell to rebalance, a significant or large portion of most people's FI, the mark to market price change of treasuries is irrelevant. IOW rebalancing is not a good reason to model one's *whole* FI on publicly traded bond index. There might be other reasons to avoid any CD's, principally just not wanting to bother to monitor that market and pick off the best deals and have accounts various different banks and CU's. Some people's time is worth more. Some people's portfolios are small and they're better off spending their time making them bigger via more personal earning than bothering much with them. But you don't have to predict anything to know most of an FI allocation anything like 60-40, 50-50 etc will not be rebalanced into stocks in any likely scenario. For that portion, the price change in treasuries is meaningless.

Corporate bonds are a different kettle of fish. They can default or much more likely be downgraded to junk and your corp bond fund of TBM fund sell them at a loss you never get back. In return for which you get some extra yield. But bringing in corporates distracts from the major difference between CD's and treasuries. Which is a potentially significantly greater yield on CD's only giving up liquidity. Which as your own example showed, you don't need for a lot or most of your fixed income allocation in order to rebalance. And happily, you don't have to choose between zero CD's and all CD's. :D

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Re: Which is better CD - rates and terms?

Post by Doc » Sun Oct 14, 2018 3:15 pm

JackoC wrote:
Sun Oct 14, 2018 2:07 pm
Again you seem to ignore the point I made then you repeated yourself a couple of posts ago. We both gave examples of how even a large decline in stocks results in having to sell a minority of one's FI to rebalance. IOW almost everyone fulfills the criterion you give in the last sentence. For that portion of FI that it's very unlikely one would sell to rebalance, a significant or large portion of most people's FI, the mark to market price change of treasuries is irrelevant. IOW rebalancing is not a good reason to model one's *whole* FI on publicly traded bond index.
I think we are talking past each other.

1) Some part of one's FI portfolio is needed for rebalancing.

2) Ideally that part would have a negative correlation with stocks if/when the stock market crashes.

3) That part should be nominal treasuries not CDs. (CDs have no or even negative correlation with stocks.)

4) The rest of you FI can be whatever you want. If you can't tolerate a paper loss then chose CD's and accept the lower return compared to high quality corporates.

5) Where does this "model one's *whole* FI on publicly traded bond" come from? Fifty percent of our FI portfolio is in Treasury notes. Less than 20% of the Treasury portion is in "publicly traded index funds". Most of the non-Treasury FI is in actively managed funds - not index funds.

Many people chose CD's over Treasuries because they have an aversion to negative price change if interest rates rise. In doing so they are ignoring that the bonds need to be thought of as part of their whole portfolio not in isolation. That same "benefit" of the no price change with CD's is a liability if that price change is an increase not a decrease because of a flight to quality situation. Threads like this one only look at the CDs in isolation.
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Re: Which is better CD - rates and terms?

Post by JackoC » Mon Oct 15, 2018 9:36 am

Doc wrote:
Sun Oct 14, 2018 3:15 pm
JackoC wrote:
Sun Oct 14, 2018 2:07 pm
Again you seem to ignore the point I made then you repeated yourself a couple of posts ago. We both gave examples of how even a large decline in stocks results in having to sell a minority of one's FI to rebalance. IOW almost everyone fulfills the criterion you give in the last sentence. For that portion of FI that it's very unlikely one would sell to rebalance, a significant or large portion of most people's FI, the mark to market price change of treasuries is irrelevant. IOW rebalancing is not a good reason to model one's *whole* FI on publicly traded bond index.
I think we are talking past each other.

1) Some part of one's FI portfolio is needed for rebalancing.

2) Ideally that part would have a negative correlation with stocks if/when the stock market crashes.

3) That part should be nominal treasuries not CDs. (CDs have no or even negative correlation with stocks.)

4) The rest of you FI can be whatever you want. If you can't tolerate a paper loss then chose CD's and accept the lower return compared to high quality corporates.

5) Where does this "model one's *whole* FI on publicly traded bond" come from? Fifty percent of our FI portfolio is in Treasury notes. Less than 20% of the Treasury portion is in "publicly traded index funds". Most of the non-Treasury FI is in actively managed funds - not index funds.

6) Many people chose CD's over Treasuries because they have an aversion to negative price change if interest rates rise. In doing so they are ignoring that the bonds need to be thought of as part of their whole portfolio not in isolation. That same "benefit" of the no price change with CD's is a liability if that price change is an increase not a decrease because of a flight to quality situation. Threads like this one only look at the CDs in isolation.
1-3 Yes, part, but you seem, and not just in this thread, to dismiss CD's based on 'they don't interact as well with the whole portfolio'. My point is simply that that point is only valid for the (generally minority) of FI allocation that has any real chance of being required for rebalancing. Nobody on this thread has said that bond price changes are irrelevant for all of FI, every post of mine has made this distinction.
4. Again this is a new theme, CD v corporate not really on the point. In fact if you look in long term history the realized return advantage of corporates over *treasuries*, especially corporate *index* is disappointingly thin, significantly less than than the average ex-ante spread of corporates over treasuries. But this is a whole other topic. Suffice it say here it's quite non-obvious that corporates beat good CD deals adjusted not only for risk in theory, but in practice the return-burning practices of corporate bond indexes and the funds which track them (principally, excluding [therefore funds selling] bonds which get downgraded to junk and paying the junk buyers big risk premia to do so, and excluding/selling bonds out of the fund when they get to a short maturity, but the best risk/return in investment grade corps historically is in short maturities)
5. Those are all public bonds as opposed to CD's.
6. I don't know who or how many people think it's an *advantage* that CD's don't change in price when rates rise but if they did it would be just as irrational as taking comfort in meaningless price changes in treasuries for the portion of one's fixed income which are highly unlikely to be subject to sale for rebalancing. I so far have not seen anyone on this forum suffering from the irrationality you mention, but it seems common on this forum for people to take comfort in meaningless bond price changes on portions of their FI which aren't subject to use in rebalancing.

And *most* of a significant allocation to FI is not realistically subject to use in rebalancing. To review for a 60/40 mix:
10% drop in the stock market means shifting 2.4 of the original 40 to stocks, 6% of your original FI
20% drop, shift 12% of your original FI
30% drop, shift 18%
50% drop, shift 30%
80% drop, shift 48%

And it's probably not a good trade off to be ready at all times for even an instant 50% stock market drop given how expensive it is, for same credit risk, to give up the yield advantage of best deal 5yr CD's v 5yr treasuries in recent yrs 1% with some effort, 60-70 bp with little effort, but subject to market conditions. Realistically the portion of FI not subject to use for rebalancing is probably 2/3's or more, hardly an afterthought.

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Re: Which is better CD - rates and terms?

Post by Doc » Mon Oct 15, 2018 11:05 am

JackoC wrote:
Mon Oct 15, 2018 9:36 am
And *most* of a significant allocation to FI is not realistically subject to use in rebalancing. To review for a 60/40 mix:
10% drop in the stock market means shifting 2.4 of the original 40 to stocks, 6% of your original FI
20% drop, shift 12% of your original FI
30% drop, shift 18%
50% drop, shift 30%
80% drop, shift 48%
We have a different viewpoint on what "significant" means but a 30% shift in FI is important to me. All I'm saying is that 30% of your FI portfolio (50% drop case) should be in Treasuries not CDs.

The following graph from '08 illustrates the point.

Treasuries vs. Corporates.

Image

Treasuries gained some 10% during the crisis while CDs (not shown) would have been essentially constant except for an early withdrawal penalty for direct CDs. (I have no info on what brokered CDs might have done but given their lower liquidity I would guess that their price declined significantly. Maybe as much as the corporates.)

Given the low TEY advantage of CDs over Treasuries and the "low" amount of your FI portfolio allocated to this "risk free" portion I choose treasuries.

But for those people who will never be buying equities in this type of stock market crash the CD route might be better at least on a "sleep well" criteria.
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Re: Which is better CD - rates and terms?

Post by EvelynTroy » Mon Oct 15, 2018 12:48 pm

This is a follow-up and thank you to KevinM.
I purchased the Treasury bills @ Schwab this morning. As you said it was easy, no commissions, and the broker assist fee of $25 was waived.
It is 6 month Treasury Bill @ 2.45% yield and tax equivalent yield of 2.60%

I had printed out your explanation of how treasury bills work, and the TEY information - again I appreciate the help on this, and felt informed when I went to the local Schwab office.

It was definitely the best offering for 6 month instrument, even without the free state tax amount, at least anything I could find.
I wanted a short-term maturity because of rising interest rates, and this being a large purchase didn't want to get locked into longer term.

And my NWFCU proceeds check went to work immediately, it did not have to clear. That was nice.

Thanks again.
Evelyn

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Re: Which is better CD - rates and terms?

Post by Chesterfield » Mon Oct 15, 2018 1:24 pm

+1. I too want to extend my appreciation for Kevin's well written and concise messages in this regard. Thank you Kevin for taking the time out to reply.

EvelynTroy wrote:
Mon Oct 15, 2018 12:48 pm
This is a follow-up and thank you to KevinM.
I purchased the Treasury bills @ Schwab this morning. As you said it was easy, no commissions, and the broker assist fee of $25 was waived.
It is 6 month Treasury Bill @ 2.45% yield and tax equivalent yield of 2.60%

I had printed out your explanation of how treasury bills work, and the TEY information - again I appreciate the help on this, and felt informed when I went to the local Schwab office.

It was definitely the best offering for 6 month instrument, even without the free state tax amount, at least anything I could find.
I wanted a short-term maturity because of rising interest rates, and this being a large purchase didn't want to get locked into longer term.

And my NWFCU proceeds check went to work immediately, it did not have to clear. That was nice.

Thanks again.
Evelyn

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Re: Which is better CD - rates and terms?

Post by Kevin M » Mon Oct 15, 2018 6:50 pm

EvelynTroy wrote:
Mon Oct 15, 2018 12:48 pm
This is a follow-up and thank you to KevinM.
I purchased the Treasury bills @ Schwab this morning. As you said it was easy, no commissions, and the broker assist fee of $25 was waived.
It is 6 month Treasury Bill @ 2.45% yield and tax equivalent yield of 2.60%

I had printed out your explanation of how treasury bills work, and the TEY information - again I appreciate the help on this, and felt informed when I went to the local Schwab office.

It was definitely the best offering for 6 month instrument, even without the free state tax amount, at least anything I could find.
I wanted a short-term maturity because of rising interest rates, and this being a large purchase didn't want to get locked into longer term.

And my NWFCU proceeds check went to work immediately, it did not have to clear. That was nice.

Thanks again.
Evelyn
That's great, Evelyn! Glad I was able to help.

Kevin
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