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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dm200
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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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dm200
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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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