Brokered CDs - often better return secondary market

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dm200
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Brokered CDs - often better return secondary market

Post by dm200 » Tue Nov 14, 2017 2:02 pm

This is a continuing puzzle (to me), but I continue to notice and often purchase (for an orgainzation I manage) secondary market brokered CDs.

Recently, for example, five year new issue brokered CDs were paying 2.40%. However, a secondary market brokered CD paid the same face rate of 2.40% and was availabke at a discount (even counting the brokerage fee) AND the maturity was two months shorter. I actually get the FDIC protection of about $100 more than what I paid.

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Re: Brokered CDs - often better return secondary market

Post by hirlaw » Tue Nov 14, 2017 2:19 pm

You may not receiving full FDIC insurance on the secondary market CD. I believe that you only receive the FDIC protection for the par value, so it leaves the buyer a bit exposed if the buyer paid, for example, $101 for the CD.

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Re: Brokered CDs - often better return secondary market

Post by Artsdoctor » Tue Nov 14, 2017 2:27 pm

^ He bought a discount CD, not a premium CD.

Yes, brokered CDs on the secondary market can offer higher yields.

You should still anticipate holding them until maturity. You won't be able to take advantage of a typical non-brokered CD's escape clause (cashing in early with minimal forfeiture of interest) and the price quoted for your brokered CD is rarely the price you'll be able to sell it for.

All of that said, if you're able to hold it until it matures, you can certainly find decent opportunities out there.

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Re: Brokered CDs - often better return secondary market

Post by saltycaper » Tue Nov 14, 2017 3:05 pm

Is it possible they are so illiquid that their illiquidity cannot be accurately priced by the retail investors who buy them at auction? If $X million is available at auction, but when sold, a much smaller amount, say, 5K-50K is available at any one time, does this help explain the difference? In other words, there's simply not enough interest to price them efficiently?

Do brokers direct retail investors that otherwise would not purchase individual fixed income product to the auctions, such that the number of interested buyers (dollars) at auction is much higher than the number of buyers (dollars) who would ever look at the secondary market? Is the secondary market "too complicated" for some auction buyers? Do any of those laddering tools brokers offer only make use of auctions and not the secondary market, where the irregular quantity of CDs available might muck things up?
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Re: Brokered CDs - often better return secondary market

Post by dm200 » Tue Nov 14, 2017 4:13 pm

I don't know for sure, but many of these secondary market "bargains" (where the rate is the same as new issue, but the price is below 'par') seem to be small leftovers from a new issue - and the issuing bank seems to want to clear them all out.

I only buy such CDs when the purchase price is face value of less (so full FDIC protection).

To find these, I just click "edit search criteria" and click on "secondary" box. Just as easy to purchase online as original issue - IF done during business day. New issues, however, can be purchased any day and any hour.

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Re: Brokered CDs - often better return secondary market

Post by MikeMak27 » Tue Nov 14, 2017 4:40 pm

I have bought secondary market CD’s through my fidelity account. I get much better rates there than new issue offerings. In fact, I would never buy a new offering again considering I was able to get a 5 year CD for 2.501% instead of the best new offering at the time of 2.30%.
You’d have to be drunk to turn down that free coin. :sharebeer
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Re: Brokered CDs - often better return secondary market

Post by dm200 » Tue Nov 14, 2017 5:30 pm

MikeMak27 wrote:
Tue Nov 14, 2017 4:40 pm
I have bought secondary market CD’s through my fidelity account. I get much better rates there than new issue offerings. In fact, I would never buy a new offering again considering I was able to get a 5 year CD for 2.501% instead of the best new offering at the time of 2.30%.
You’d have to be drunk to turn down that free coin. :sharebeer
At Vanguard, at least, you have to be careful using the stated APY (that takes the discount or premium into account). You must (and I do) take into account the (I believe) $60 brokerage fee to adjust the APY before making the purchase.

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Re: Brokered CDs - often better return secondary market

Post by hoops777 » Tue Nov 14, 2017 6:13 pm

I own a lot of these.The deals have not been as good as they were a couple years ago.Great if you want to really keep it simple and keep everything in your brokerage account.I am content with mine and do not care about losing the flexibility of bank CDs.
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Re: Brokered CDs - often better return secondary market

Post by triceratop » Tue Nov 14, 2017 6:23 pm

dm200 wrote:
Tue Nov 14, 2017 5:30 pm
MikeMak27 wrote:
Tue Nov 14, 2017 4:40 pm
I have bought secondary market CD’s through my fidelity account. I get much better rates there than new issue offerings. In fact, I would never buy a new offering again considering I was able to get a 5 year CD for 2.501% instead of the best new offering at the time of 2.30%.
You’d have to be drunk to turn down that free coin. :sharebeer
At Vanguard, at least, you have to be careful using the stated APY (that takes the discount or premium into account). You must (and I do) take into account the (I believe) $60 brokerage fee to adjust the APY before making the purchase.
While I have not done so personally, if you are not at Vanguard and say at Merrill Edge where I invest, this can really make a difference. Merrill Edge gives you the yield as quoted on brokered CDs. I cannot guarantee they do not adjust the quotes, so I guess that would be one thing to check (or hear from someone more directly experienced), but it certainly appears to be worth investigation. That is assuming you are at all flexible on where you invest.
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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Tue Nov 14, 2017 6:47 pm

dm200 wrote:
Tue Nov 14, 2017 5:30 pm
At Vanguard, at least, you have to be careful using the stated APY (that takes the discount or premium into account). You must (and I do) take into account the (I believe) $60 brokerage fee to adjust the APY before making the purchase.
Just looked at the brokerage fees recently, and for less than Voyager Select ($500K), it's $2 per CD, and for Voyager Select or above, it's $1 per CD (secondary market--no commissions on new issues). So for accounts less than $500K, that's $2 per $1,000 or 20 basis points. I was looking at 2-year CDs, so 20 basis points over 2 years is about a 10 bps reduction in yield. The secondary market premiums I was seeing weren't much more than that, and the available amounts were quite small.

I'll look now. For new issue 2-year I'm seeing 1.80%. Best secondary I see is 2.00%, but there are only 2 available. Rate I see for a decent quantity is 1.921%, so that just barely beats the new issue after $2 per CD commission.

I'm sure better deals come along, but I guess you have to check frequently.

I've been sticking with direct CDs, but now am considering brokered CDs for my mom and her husband, to keep things simpler for them and for me (as their successor trustee). Especially for shorter terms, the term risk is low enough that an early withdrawal option doesn't mean much. I'm considering moving enough of their assets to Vanguard to qualify for Voyager Select to cut the commission in half in case we find some decent secondaries.

It hurts though, since you can get 2.0% on a 2-year CD and 2.35% on a 3-year CD at USAlliance credit union (of course with no commissions). The downside is having to open another trust account at another financial institution (paper forms required, including a notarized affidavit of trust), and possibly having to deal with another financial institution as successor trustee.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Tue Nov 14, 2017 8:26 pm

Kevin M wrote:
Tue Nov 14, 2017 6:47 pm
dm200 wrote:
Tue Nov 14, 2017 5:30 pm
At Vanguard, at least, you have to be careful using the stated APY (that takes the discount or premium into account). You must (and I do) take into account the (I believe) $60 brokerage fee to adjust the APY before making the purchase.
Just looked at the brokerage fees recently, and for less than Voyager Select ($500K), it's $2 per CD, and for Voyager Select or above, it's $1 per CD (secondary market--no commissions on new issues). So for accounts less than $500K, that's $2 per $1,000 or 20 basis points. I was looking at 2-year CDs, so 20 basis points over 2 years is about a 10 bps reduction in yield. The secondary market premiums I was seeing weren't much more than that, and the available amounts were quite small.
I'll look now. For new issue 2-year I'm seeing 1.80%. Best secondary I see is 2.00%, but there are only 2 available. Rate I see for a decent quantity is 1.921%, so that just barely beats the new issue after $2 per CD commission.
I'm sure better deals come along, but I guess you have to check frequently.
I've been sticking with direct CDs, but now am considering brokered CDs for my mom and her husband, to keep things simpler for them and for me (as their successor trustee). Especially for shorter terms, the term risk is low enough that an early withdrawal option doesn't mean much. I'm considering moving enough of their assets to Vanguard to qualify for Voyager Select to cut the commission in half in case we find some decent secondaries.
It hurts though, since you can get 2.0% on a 2-year CD and 2.35% on a 3-year CD at USAlliance credit union (of course with no commissions). The downside is having to open another trust account at another financial institution (paper forms required, including a notarized affidavit of trust), and possibly having to deal with another financial institution as successor trustee.
Kevin
OK - I usually buy the CDs in chunks of $30,000. The one for 2.40% (FACE) was discounted about $150 or so - still discount afer brokerage fee. That 2.40% rates was the same as the new issue at par (no brokerage fee).

Having all of the funds in one place AND having many different issuing banks to keep within the $250,000 FDIC limit is a real benefit for the organizion (lower risk). For various asset liability management and accounting reasons, we do not want the interest to accrue/compound in the CDs - so that is not a problem with the brokered Cds either.

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Re: Brokered CDs - often better return secondary market

Post by saltycaper » Tue Nov 14, 2017 10:55 pm

At Fidelity, it's just $1 per $1,000 no matter your balance, though I imagine yields differ by broker, possibly in part due to fees you may not see.
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Re: Brokered CDs - often better return secondary market

Post by alpenglow » Wed Nov 15, 2017 9:57 am

I would guess that it is due to illiquidity. In the past few years, I've purchased a number of secondary market CDs for my Mother's account. The deals were quite good at the time. Oddly enough, with rising interest rates, the deals aren't as good of late, for reasons I can't explain.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Wed Nov 15, 2017 2:15 pm

Today's example -

New issue 5 year Vanguard brokered CDs 2.40% rate (several issuers)

A five year (maturing 11/8/22) secondary market CD at the same 2.40% at .99385 or 2.532 (before brokerage charge). If I buy 30,000 - I would pay 29,815.50 +60 or 29865.50 for $30,000 face value. I believe that actual return for this purchase amount is 2.47%

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Wed Nov 15, 2017 2:25 pm

alpenglow wrote:
Wed Nov 15, 2017 9:57 am
I would guess that it is due to illiquidity. In the past few years, I've purchased a number of secondary market CDs for my Mother's account. The deals were quite good at the time. Oddly enough, with rising interest rates, the deals aren't as good of late, for reasons I can't explain.
5-year CD rates have not been rising, but shorter-term CD rates have. So the CD yield curve has been flattening.

The Treasury yield curve also has been flattening in the 1-5 year range since short-term rates started rising in 2015, but unlike CDs, the 5-year yield has risen (but the 1-year yield has risen even more, hence the flattening). The higher 5-year yield without a corresponding increase in the best 5-year CD rates explains the much lower yield premiums we see now compared to the last few years.

This chart shows the increasing yields and flattening yield curve for the 1-year and 5-year Treasuries since 2015:

Image

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Wed Nov 15, 2017 2:48 pm

dm200 wrote:
Wed Nov 15, 2017 2:15 pm
Today's example -

New issue 5 year Vanguard brokered CDs 2.40% rate (several issuers)

A five year (maturing 11/8/22) secondary market CD at the same 2.40% at .99385 or 2.532 (before brokerage charge). If I buy 30,000 - I would pay 29,815.50 +60 or 29865.50 for $30,000 face value. I believe that actual return for this purchase amount is 2.47%
Doing the approximate yield calc in my head, at $2 per $1,000 or 20 basis points, that's 20/5 = 4 basis points per year reduction in yield, so 2.532 - 0.04 = 2.492%. Using the RATE function, I calculate it as 2.489%. Rounding to two decimals, it's 2.49% either way. I believe the RATE calc gives a slightly lower value because you're taking the entire commission cash flow hit in the beginning instead of spreading it out over five years.

As a check, I verify the 2.532% yield before commission using the same RATE formula.

At any rate, a benefit of about 9 basis points, and it does get you closer to the 2.50% that you can get in a 5-year CD with an EWP of six months of interest (2.60% with EWP of one year of interest).

Currently the best direct CD deals are better at 2-year and 3-year maturities, and the advantage over brokered CDs, even secondary, is greater. Of course with the shorter-term CDs, you take more of a hit from the commission, since it's spread over only 2 or 3 years instead of 5 years.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Wed Nov 15, 2017 4:30 pm

Of course with the shorter-term CDs, you take more of a hit from the commission, since it's spread over only 2 or 3 years instead of 5 years.

Sure - the longer the term of the CD, in general, the more likely the secondary market seems to be more of a potential benefit.

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Re: Brokered CDs - often better return secondary market

Post by oslocal » Mon Jan 08, 2018 7:28 pm

So is it correct to assume that for comparison sake, if my commission schedule is $1/ $1000 face value (Vanguard 401k VBO), then I remove 10 bps divided by the term to the yield ( e.g. 2 bps on a 5y CD) (a simplification).

If I am "certain" I will hold to maturity (objective is not liquidity), would it be reasonable to use interchangeably treasurys, CDs, gov't agency bonds (whichever has highest yield) in the ladder?

Does Vanguard calculate my overall avg. maturity/duration on a mix of CDs and bonds?

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Re: Brokered CDs - often better return secondary market

Post by saltycaper » Mon Jan 08, 2018 11:06 pm

oslocal wrote:
Mon Jan 08, 2018 7:28 pm

So is it correct to assume that for comparison sake, if my commission schedule is $1/ $1000 face value (Vanguard 401k VBO), then I remove 10 bps divided by the term to the yield ( e.g. 2 bps on a 5y CD) (a simplification).
I don't think it's mathematically correct, but it should be within a basis point or two for likely yields in the current environment. At Fidelity, you can see the fee-inclusive effective yield on the screen before you hit the final submit button for your order. Does Vanguard not do this?

Even though both are relatively safe from loss of principal in nominal terms, I would need some extra compensation to hold a brokered CD over a Treasury bond. The liquidity is worth something to me even if I don't think I'll "need" the money. I might, for instance, want to sell the security before maturity simply to roll it into a longer-dated security if the short end of the yield curve is as it had been for years following the Great Recession. (I wouldn't have wanted to bother holding Treasury bills/notes or brokered CDs that mature within a couple years because the yields were so low.) There is also the chance the bank goes under and I get back par value but lose future interest payments, and I may be forced to reinvest at lower yields.
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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Tue Jan 09, 2018 3:47 pm

oslocal wrote:
Mon Jan 08, 2018 7:28 pm
So is it correct to assume that for comparison sake, if my commission schedule is $1/ $1000 face value (Vanguard 401k VBO), then I remove 10 bps divided by the term to the yield ( e.g. 2 bps on a 5y CD) (a simplification).
Yes, this will be a very close estimate if not exact. If you have basic spreadsheet skills, it's easy to calculate the exact net yield using the YIELD function; I have a spreadsheet set up to do this, as well as to calculate my taxable equivalent yield for issues bought in a taxable account. I'll look at an example now of the estimate vs. the actual for a AAA muni bond I evaluated earlier today. Here are the bond characteristics:

Settlement: 1/11/2018
Maturity: 10/1/2022
Coupon: 4.500%
Price: 112.560
Yield: 1.719% (displayed on the Fidelity screen, and same value calculated with the YIELD function)

The term of this bond is 4.72 years, so dividing 0.1% commission by 4.72 gives 0.0212% (percentage points), and subtracting that from 1.719% gives 1.698%, which is exactly the net yield calculated with the YIELD function using the after-commission price of 112.660 (intermediate values I'm showing here are rounded, but calculations use precise values in the spreadsheet). So at least for this example, using the estimate works perfectly.

Incidentally, I did not buy this bond, as there were better deals available. I bought a 17-month AAA muni bond with a net yield of 1.819%, which for me is a taxable-equivalent yield of 2.575%, which of course is excellent for a 1.5 year term.
If I am "certain" I will hold to maturity (objective is not liquidity), would it be reasonable to use interchangeably treasurys, CDs, gov't agency bonds (whichever has highest yield) in the ladder?
That's what I would do. Of course there is a significant liquidity premium/discount in the price/yield of Treasuries, but if you are willing to bear the relative illiquidity of a CD in return for the yield premium, why not go for it? Just looking at new issue CDs, 1-year Treasuries have a slight advantage right now, so the Treasury is the better deal from all perspectives. However, at two years the CD has a yield premium of 28 basis points, so CDs look more attractive at two years and beyond. Note however that the yield premiums of CDs are much lower than they have been in recent years (my average since late 2010 is more than 100 basis points).

This is all relevant for a tax-advantaged account. For taxable accounts, I'm finding much better deals in AAA municipal bonds.
Does Vanguard calculate my overall avg. maturity/duration on a mix of CDs and bonds?
If they do, I can't find it, but it's pretty easy to do in a spreadsheet.

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Re: Brokered CDs - often better return secondary market

Post by hirlaw » Tue Jan 09, 2018 4:26 pm

When you purchase bonds on the Fidelity brokerage website, you can preview the purchase prior to committing. The preview (supposedly) gives you the after commissions effective yield you would be obtaining on the purchase.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Tue Jan 09, 2018 4:44 pm

hirlaw wrote:
Tue Jan 09, 2018 4:26 pm
When you purchase bonds on the Fidelity brokerage website, you can preview the purchase prior to committing. The preview (supposedly) gives you the after commissions effective yield you would be obtaining on the purchase.
When I purchase secondary market CDs at Vanguard, I see the same thing.

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Tue Jan 09, 2018 6:25 pm

dm200 wrote:
Tue Jan 09, 2018 4:44 pm
hirlaw wrote:
Tue Jan 09, 2018 4:26 pm
When you purchase bonds on the Fidelity brokerage website, you can preview the purchase prior to committing. The preview (supposedly) gives you the after commissions effective yield you would be obtaining on the purchase.
When I purchase secondary market CDs at Vanguard, I see the same thing.
Both true, and they are accurate, as they always agree with the values I calculate using the YIELD function.

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Re: Brokered CDs - often better return secondary market

Post by nbseer » Tue Jan 09, 2018 6:55 pm

A Vanguard advisor told me to stick with new issue CDs of short duration.. no longer than 2 years, to take advantage of rising interest rates. I just bought BNY new issue cds for my tIRA, one-year at 1.6%.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Tue Jan 09, 2018 7:01 pm

nbseer wrote:
Tue Jan 09, 2018 6:55 pm
A Vanguard advisor told me to stick with new issue CDs of short duration.. no longer than 2 years, to take advantage of rising interest rates. I just bought BNY new issue cds for my tIRA, one-year at 1.6%.
OK - make a note of the offered rates of longer term CDs NOW, and see what rates are in a year or two. See if that advisor was able to accurately predict rates (of the maturities and terms you otherwise would have purchased).

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Re: Brokered CDs - often better return secondary market

Post by jimishooch » Wed Jan 10, 2018 1:02 pm

Kevin M wrote:
Tue Jan 09, 2018 3:47 pm
oslocal wrote:
Mon Jan 08, 2018 7:28 pm
So is it correct to assume that for comparison sake, if my commission schedule is $1/ $1000 face value (Vanguard 401k VBO), then I remove 10 bps divided by the term to the yield ( e.g. 2 bps on a 5y CD) (a simplification).
Yes, this will be a very close estimate if not exact. If you have basic spreadsheet skills, it's easy to calculate the exact net yield using the YIELD function; I have a spreadsheet set up to do this, as well as to calculate my taxable equivalent yield for issues bought in a taxable account. I'll look at an example now of the estimate vs. the actual for a AAA muni bond I evaluated earlier today. Here are the bond characteristics:

Settlement: 1/11/2018
Maturity: 10/1/2022
Coupon: 4.500%
Price: 112.560
Yield: 1.719% (displayed on the Fidelity screen, and same value calculated with the YIELD function)

The term of this bond is 4.72 years, so dividing 0.1% commission by 4.72 gives 0.0212% (percentage points), and subtracting that from 1.719% gives 1.698%, which is exactly the net yield calculated with the YIELD function using the after-commission price of 112.660 (intermediate values I'm showing here are rounded, but calculations use precise values in the spreadsheet). So at least for this example, using the estimate works perfectly.

Incidentally, I did not buy this bond, as there were better deals available. I bought a 17-month AAA muni bond with a net yield of 1.819%, which for me is a taxable-equivalent yield of 2.575%, which of course is excellent for a 1.5 year term.
If I am "certain" I will hold to maturity (objective is not liquidity), would it be reasonable to use interchangeably treasurys, CDs, gov't agency bonds (whichever has highest yield) in the ladder?
That's what I would do. Of course there is a significant liquidity premium/discount in the price/yield of Treasuries, but if you are willing to bear the relative illiquidity of a CD in return for the yield premium, why not go for it? Just looking at new issue CDs, 1-year Treasuries have a slight advantage right now, so the Treasury is the better deal from all perspectives. However, at two years the CD has a yield premium of 28 basis points, so CDs look more attractive at two years and beyond. Note however that the yield premiums of CDs are much lower than they have been in recent years (my average since late 2010 is more than 100 basis points).

This is all relevant for a tax-advantaged account. For taxable accounts, I'm finding much better deals in AAA municipal bonds.
Does Vanguard calculate my overall avg. maturity/duration on a mix of CDs and bonds?
If they do, I can't find it, but it's pretty easy to do in a spreadsheet.

Kevin
do you have the CUSIP for the bond you bought?
thx
jim

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Re: Brokered CDs - often better return secondary market

Post by oslocal » Wed Jan 10, 2018 1:08 pm

Do anyone have experience buying CDs and Bonds via Vanguard's phone fixed income desk?
It appears that our 401k VBO does not allow buying bonds, treasurys or CDs online, but require calling the fixed income desk. I presume this is to prevent the buying of tax exempt securities which is not allowed in the plan.


Should you write down a list of the securities you plan to acquire and then make a call to make the transactions?

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Wed Jan 10, 2018 5:02 pm

oslocal wrote:
Wed Jan 10, 2018 1:08 pm
Do anyone have experience buying CDs and Bonds via Vanguard's phone fixed income desk?
It appears that our 401k VBO does not allow buying bonds, treasurys or CDs online, but require calling the fixed income desk. I presume this is to prevent the buying of tax exempt securities which is not allowed in the plan.

Should you write down a list of the securities you plan to acquire and then make a call to make the transactions?
Yes, I recently bought CDs and/or Treasuries using the Vanguard fixed income desk. The only reason was that one of my online buy orders was cancelled because the funds transferred into the settlement account had not cleared. The broker was able to override the system based on other factors, entered the buy order for me, and it was executed. There was no additional commission.

I would first use the online system to find the bonds or CDs you want to buy. Ideally I would have the search screen in front of me showing the CDs or bonds of interest, so I could verify that the price/yield and maturity quoted by the broker matched what I saw online. Then just give the broker the CUSIP number for each CD or bond, and he/she will verify the order and enter it for you. You can then go to your order status page to monitor the executions.

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Wed Jan 10, 2018 5:17 pm

jimishooch wrote:
Wed Jan 10, 2018 1:02 pm
do you have the CUSIP for the bond you bought?
thx
jim
Not sure why you want it, as the best muni bond deals change daily. But I'm glad to provide it anyway: 262579NS0. Searching on this CUSIP, I don't see any currently available. Searching earlier today, I did not find any deals that were nearly this attractive, or attractive enough for me to buy. But I still saw taxable equivalent yields that were significantly superior to CDs of same maturities, for example, a 1-year AAA muni in the 2.3% taxable-equivalent yield ballpark (as I recall).

Kevin
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Re: Brokered CDs - often better return secondary market

Post by jimishooch » Wed Jan 10, 2018 8:07 pm

Kevin M wrote:
Wed Jan 10, 2018 5:17 pm
jimishooch wrote:
Wed Jan 10, 2018 1:02 pm
do you have the CUSIP for the bond you bought?
thx
jim
Not sure why you want it, as the best muni bond deals change daily. But I'm glad to provide it anyway: 262579NS0. Searching on this CUSIP, I don't see any currently available. Searching earlier today, I did not find any deals that were nearly this attractive, or attractive enough for me to buy. But I still saw taxable equivalent yields that were significantly superior to CDs of same maturities, for example, a 1-year AAA muni in the 2.3% taxable-equivalent yield ballpark (as I recall).

Kevin
yeah, it's gone,
always interested in what forum members are buying (not a lot of us on this forum)...2 year is about as far out as i'll go as i hold until maturity...
thx
jim

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Kevin M
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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Thu Jan 11, 2018 1:02 am

jimishooch wrote:
Wed Jan 10, 2018 8:07 pm
yeah, it's gone,
always interested in what forum members are buying (not a lot of us on this forum)...2 year is about as far out as i'll go as i hold until maturity...
thx
jim
I've been buying mainly in the 17-25 month range since mid-December, but have gone out as far as four years (1.975%, which is about 2.8% taxable-equivalent for me). I started out buying mainly Texas school district bonds, since these were consistently the highest yields, but have been diversifying into other states after my initial buying spree.

After buying initially at Vanguard, I discovered that Fidelity has consistently higher yields, so have been buying at Fidelity since then.

The highest yields are almost consistently for small lots, like 5-10 bonds. I've been buying mainly 10-bond lots.

I've been sticking with bonds rated AAA by either Moody's or S&P, but have started eyeballing lower-rated bonds for the shorter terms, since default rates for all rated muni bonds have been close to 0%, especially if you avoid housing and hospitals.

Kevin
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Re: Brokered CDs - often better return secondary market

Post by jimishooch » Thu Jan 11, 2018 9:34 am

Kevin M wrote:
Thu Jan 11, 2018 1:02 am
jimishooch wrote:
Wed Jan 10, 2018 8:07 pm
yeah, it's gone,
always interested in what forum members are buying (not a lot of us on this forum)...2 year is about as far out as i'll go as i hold until maturity...
thx
jim
I've been buying mainly in the 17-25 month range since mid-December, but have gone out as far as four years (1.975%, which is about 2.8% taxable-equivalent for me). I started out buying mainly Texas school district bonds, since these were consistently the highest yields, but have been diversifying into other states after my initial buying spree.

After buying initially at Vanguard, I discovered that Fidelity has consistently higher yields, so have been buying at Fidelity since then.

The highest yields are almost consistently for small lots, like 5-10 bonds. I've been buying mainly 10-bond lots.

I've been sticking with bonds rated AAA by either Moody's or S&P, but have started eyeballing lower-rated bonds for the shorter terms, since default rates for all rated muni bonds have been close to 0%, especially if you avoid housing and hospitals.

Kevin
how are you keeping accrued interest as low as possible?

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Thu Jan 11, 2018 1:56 pm

jimishooch wrote:
Thu Jan 11, 2018 9:34 am
how are you keeping accrued interest as low as possible?
Why should I care? I haven't been paying any attention to that.
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Re: Brokered CDs - often better return secondary market

Post by dm200 » Thu Jan 11, 2018 2:00 pm

Kevin M wrote:
Thu Jan 11, 2018 1:56 pm
jimishooch wrote:
Thu Jan 11, 2018 9:34 am
how are you keeping accrued interest as low as possible?
Why should I care? I haven't been paying any attention to that.
Why would you want to do this?

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Re: Brokered CDs - often better return secondary market

Post by saltycaper » Thu Jan 11, 2018 3:02 pm

jimishooch wrote:
Thu Jan 11, 2018 9:34 am
how are you keeping accrued interest as low as possible?
If you are concerned about paying taxes on interest you didn't receive, your broker should report accrued interest on your 1099, and on your Schedule B, you should be able to subtract it from interest received.
Quod vitae sectabor iter?

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Thu Jan 11, 2018 4:59 pm

saltycaper wrote:
Thu Jan 11, 2018 3:02 pm
jimishooch wrote:
Thu Jan 11, 2018 9:34 am
how are you keeping accrued interest as low as possible?
If you are concerned about paying taxes on interest you didn't receive, your broker should report accrued interest on your 1099, and on your Schedule B, you should be able to subtract it from interest received.
This should not be an issue for tax-exempt municipal bonds, at least at the federal level, since no federal tax is paid on the interest. I guess it will be a small consideration for non-CA muni bonds (as a CA resident) for state tax purposes, but I assume my tax software or tax accountant will handle it appropriately.

Kevin
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Re: Brokered CDs - often better return secondary market

Post by ofckrupke » Thu Jan 11, 2018 5:18 pm

These are surely premium bonds, and as they are federally tax exempt the premium must be amortized, so the broker will report it, which numbers the holder/agent/software can use to adjust the CA taxable interest income for entry on his form 540CA.
[A question was raised in another topic as to whether it is necessary to maintain a single basis for state and federal taxation when holding premium bonds that are exempt for one but not the other taxing authority....and at this point, was not definitively resolved.]

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Re: Brokered CDs - often better return secondary market

Post by in_reality » Thu Jan 11, 2018 8:14 pm

Kevin M wrote:
Thu Jan 11, 2018 1:02 am
jimishooch wrote:
Wed Jan 10, 2018 8:07 pm
yeah, it's gone,
always interested in what forum members are buying (not a lot of us on this forum)...2 year is about as far out as i'll go as i hold until maturity...
thx
jim
I've been buying mainly in the 17-25 month range since mid-December, but have gone out as far as four years (1.975%, which is about 2.8% taxable-equivalent for me). I started out buying mainly Texas school district bonds, since these were consistently the highest yields, but have been diversifying into other states after my initial buying spree.
Wow, I really respect your ability to find the best deal on the table, but could never go individual bonds.

For example, Texas schools were just ruled to have illegally kept eligible students out of special education programs by setting a cap (which was below the national average) and training staff to intentionally ignore problems in order to meet the cap.

https://www.huffingtonpost.com/entry/te ... a4f8b6ac74

I understand the desire to keep costs low -- we all know the benefit of that right -- but do think there should be penalties and remedies when the rule of law isn't followed especially considering how much of an impact a little specialized help and accommodation can have to a human's development when they are in a system designed for typical people and are outside that range (which actually is normal because we human fall on a range).

Anyway, I did look at individual bonds yesterday for an amount from rebalancing out of stocks but couldn't do it. I am probably overestimating default risk and underestimating inflation risk, but tend to go with term risk over credit.

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Re: Brokered CDs - often better return secondary market

Post by saltycaper » Thu Jan 11, 2018 11:30 pm

Kevin M wrote:
Thu Jan 11, 2018 4:59 pm

This should not be an issue for tax-exempt municipal bonds, at least at the federal level, since no federal tax is paid on the interest. I guess it will be a small consideration for non-CA muni bonds (as a CA resident) for state tax purposes, but I assume my tax software or tax accountant will handle it appropriately.

Kevin
Dealing with accrued interest and taxes, the tax software doesn't seem very capable. Last year, I could not adjust the interest received by the amortized bond premium and the accrued interest at the same time. (H&R Block software.) I had to split the interest received and create a separate entry on Schedule B on a tip from user HueyLD, who experienced the same problem with a different program. Certainly more you need to know when holding individual bonds in taxable.

(I realize you were talking about munis, but I wasn't sure jimishooch was referring only to munis since there was lots of brokered CD discussion in this thread.)
Quod vitae sectabor iter?

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Re: Brokered CDs - often better return secondary market

Post by junesen » Thu Jan 18, 2018 10:50 pm

It would make sense that the secondary market would offer better returns, but I haven't seen ANY secondary market issues that come close to the new issues. For example: at TD Ameritrade, there are 3 new issues of the 5 year CD for 2.65 Coupon (one of them is a Goldman Sachs with 01-24-2023 maturity). But the price for a secondary Goldman Sachs that mature in 02-13-2023 with a Coupon of 2.50 has a price of 100.192 and a APY/YTW of 2.459. This seems to be the case for all secondary issues.

Am I missing something? Why should I pay more for less yield and more fees?

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Re: Brokered CDs - often better return secondary market

Post by Wagnerjb » Fri Jan 19, 2018 9:44 am

junesen wrote:
Thu Jan 18, 2018 10:50 pm
It would make sense that the secondary market would offer better returns, but I haven't seen ANY secondary market issues that come close to the new issues. For example: at TD Ameritrade, there are 3 new issues of the 5 year CD for 2.65 Coupon (one of them is a Goldman Sachs with 01-24-2023 maturity). But the price for a secondary Goldman Sachs that mature in 02-13-2023 with a Coupon of 2.50 has a price of 100.192 and a APY/YTW of 2.459. This seems to be the case for all secondary issues.

Am I missing something? Why should I pay more for less yield and more fees?
Not sure what you are doing wrong. When I look at Fidelity, I see a secondary brokered CD with a YTW of 2.776%, maturing in Feb 2023. There are others at 2.76% and 2.75% as well with maturities within one month of Jan 2023.

Maybe you aren't asking the program to rank them by YTW. When I search, I often see some very inferior yields and I wonder if anybody ever buys those issues. But I always rank the CDs by YTW and I just look at the top ones anyway.

Best wishes.
Andy

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Fri Jan 19, 2018 10:23 am

junesen wrote:
Thu Jan 18, 2018 10:50 pm
It would make sense that the secondary market would offer better returns, but I haven't seen ANY secondary market issues that come close to the new issues. For example: at TD Ameritrade, there are 3 new issues of the 5 year CD for 2.65 Coupon (one of them is a Goldman Sachs with 01-24-2023 maturity). But the price for a secondary Goldman Sachs that mature in 02-13-2023 with a Coupon of 2.50 has a price of 100.192 and a APY/YTW of 2.459. This seems to be the case for all secondary issues.

Am I missing something? Why should I pay more for less yield and more fees?
Although not always, much of the time at Vanguard, secondary market Brokered CDs from more than 3 year maturities on have a higher yield.

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Re: Brokered CDs - often better return secondary market

Post by junesen » Fri Jan 19, 2018 3:25 pm

Wagnerjb wrote:
Fri Jan 19, 2018 9:44 am
Not sure what you are doing wrong. When I look at Fidelity, I see a secondary brokered CD with a YTW of 2.776%, maturing in Feb 2023. There are others at 2.76% and 2.75% as well with maturities within one month of Jan 2023.

Maybe you aren't asking the program to rank them by YTW. When I search, I often see some very inferior yields and I wonder if anybody ever buys those issues. But I always rank the CDs by YTW and I just look at the top ones anyway.

Best wishes.
Maybe it is a TD Ameritrade thing? Now I see the higher yielding secondary market CDs when I go to Fidelity or Vanguard and do a search, but I don't see any at TD Ameritrade. Since the money I have to purchase the CDs are at TD Ameritrade, I didn't do a "search" at Fidelity or Vanguard until now. It could be a web problem at TD Ameritrade (the first time I tried to access the CD screens, I got a blank screen, and a lot of their buttons to filter out different issues just doesn't work or works incorrectly).

Seems like the fees are not very well explained. I take it that the fees are for each "issue" of $1,000 and that to buy $10,000 worth would be 10xfee? Which of the brokerages have the lowest fees?

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Re: Brokered CDs - often better return secondary market

Post by junesen » Fri Jan 19, 2018 3:45 pm

junesen wrote:
Fri Jan 19, 2018 3:25 pm
Maybe it is a TD Ameritrade thing?
I just talked to a "fixed income specialist" at TD Ameritrade and asked him why I don't see any higher yields on the secondary market and he told me that the environment is just not good for secondary CDs. I said that there are secondary issues at other brokerage houses with higher yields than the primary issues and he just told me that they are not "Fidelity" or "Vanguard". I asked about their fees for the secondary issues and he said there is none--it is built into the price of the CDs. I think I know why there are no competitive secondary issues at TD Ameritrade now... the fees make them non-competitive.

I have become disenchanted with TD Ameritrade (had them since they were Ameritrade). It seems like they are now more interested in selling advise and not for the self directed investors.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Fri Jan 19, 2018 4:18 pm

OK - here is one - as of a minute or two ago.

Five year new issue Vanguard brokered CDs available at rate of 2.65%. Multiple banks making such CDs available.

Secondary market Discover Bank rate 2.65% at 99.5% of face maturing 1/19/2023 with yield of 2.758% . BUT that does not consider the brokerage fee. If I purchase 50,000 face value - that would cost 49,750 - and the yield would be 2.715%. Offerings like this are common.

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Re: Brokered CDs - often better return secondary market

Post by junesen » Fri Jan 19, 2018 5:55 pm

My guess that the fees are making the secondary CD offerings at TD Ameritrade not competitive has been borne out. I compared the same CUSIP at Vanguard, Fidelity, and TD Ameritrade and the Price at TD Ameritrade was about 1 point higher. For example, one issue selling for 98.912 at both Fidelity and Vanguard was priced at 99.901 at TD Ameritrade. This amounts to around $10 per $1000 instead of the $1 or $2 at Fidelity or Vanguard.

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Re: Brokered CDs - often better return secondary market

Post by junesen » Sat Jan 20, 2018 1:30 pm

dm200 wrote:
Tue Nov 14, 2017 2:02 pm
This is a continuing puzzle (to me)
I presume your "puzzle" is why secondary brokered CDs are often better than the primary issue?
If that is your question, I have several answers:
1. Primary issues are no fee to the buyer, which means that the issuer pays some sort of commission to the selling broker. If they sell in the secondary market, they probably won't have to pay this commission and can offer a better rate.
2. If you are buying a CD with the same yield, would you buy a primary issue with no fees, or would you buy a secondary issue that is identical with the primary but with fees? I would opt for the primary issue with no fees. So if you are the secondary seller, you'd have to price your secondary issue so it is more attractive to the buyer. Since fees vary at different brokerages, you might have to put it at a much better rate to attract buyers at those brokerages that have high fees.
3. I would presume some of the sellers of the secondary CD are individuals who are selling because of some unforeseen emergency and need the money quick. They price the secondary CD so that it would sell fast.

My question is why are there secondary issues that have worse returns than the primary issues? Do they expect them to sell?

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Sat Jan 20, 2018 2:07 pm

junesen wrote:
Sat Jan 20, 2018 1:30 pm
dm200 wrote:
Tue Nov 14, 2017 2:02 pm
This is a continuing puzzle (to me)
I presume your "puzzle" is why secondary brokered CDs are often better than the primary issue?
If that is your question, I have several answers:
1. Primary issues are no fee to the buyer, which means that the issuer pays some sort of commission to the selling broker. If they sell in the secondary market, they probably won't have to pay this commission and can offer a better rate.
2. If you are buying a CD with the same yield, would you buy a primary issue with no fees, or would you buy a secondary issue that is identical with the primary but with fees? I would opt for the primary issue with no fees. So if you are the secondary seller, you'd have to price your secondary issue so it is more attractive to the buyer. Since fees vary at different brokerages, you might have to put it at a much better rate to attract buyers at those brokerages that have high fees.
3. I would presume some of the sellers of the secondary CD are individuals who are selling because of some unforeseen emergency and need the money quick. They price the secondary CD so that it would sell fast.
My question is why are there secondary issues that have worse returns than the primary issues? Do they expect them to sell?
#1 - Maybe, but I thought it was not the banks selling on the secondary market. Or is it, sometimes?

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Re: Brokered CDs - often better return secondary market

Post by junesen » Mon Jan 22, 2018 6:25 pm

dm200 wrote:
Sat Jan 20, 2018 2:07 pm
#1 - Maybe, but I thought it was not the banks selling on the secondary market. Or is it, sometimes?
I don't know for sure. I bought some new issues a couple of weeks back and I still see the same CUSIP on the secondary market. I am assuming that the banks are selling the "unsold" portions on the secondary market (it could be someone who just bought it and is turning around immediately to sell it at a loss?)

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Re: Brokered CDs - often better return secondary market

Post by TreadLightly » Tue Apr 24, 2018 4:01 pm

I'm new to this and a tad confused. I thought YTM factors in the discounted price, thus the higher YTM for a CD with a lower original yield.

So when I'm shopping secondary CDs, I should just have to compare YTM and factor in fees, right?

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