Liquidity/Sale of Brokered CD

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hirlaw
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Liquidity/Sale of Brokered CD

Post by hirlaw » Wed Mar 14, 2018 5:14 pm

I am considering a 5 yr. brokered CD at Fidelity. I was wondering if anyone has any input on the ability to sell these CD's if desired in the future. I understand the interest rate risk, but is there an active market? Is there a large bid/ask spread (where the seller would take a big haircut)?

Thanks!

livesoft
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Re: Liquidity/Sale of Brokered CD

Post by livesoft » Wed Mar 14, 2018 5:52 pm

If I was going to do this, then I would look to see what secondary CDs that Fidelity is selling now. I suppose that one can see bid/ask and also the number available, so that if one is paying attention, then one could see if the amount or number changes from day-to-day to get an ideas of the liquidity.

So if you do that, what do you see?
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Spirit Rider
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Re: Liquidity/Sale of Brokered CD

Post by Spirit Rider » Wed Mar 14, 2018 5:56 pm

They are not very liquid at all. Also. in a rising rate environment they tend to get hit much harder than bonds. This means your liquidation haircut is highly correlated to market conditions. Current liquidity is not a good metric for the future.

This as opposed to non-marketable CD's, which have a fixed cost of redemption. even in the worst of circumstances.

I would only buy a brokered CD that I was virtually assured I would hold it to maturity.

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Re: Liquidity/Sale of Brokered CD

Post by Longdog » Wed Mar 14, 2018 6:12 pm

You’ll be able to sell it, but there is no guarantee that you’ll get par. It depends on market conditions (primarily interest rates) at the time you sell, if you don’t hold to maturity. Buy it if you intend to hold to maturity, but realize that you can sell it early if you absolutely need to, or if you’re lucky and interest rates drop you might sell for a profit.
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Re: Liquidity/Sale of Brokered CD

Post by ChinchillaWhiplash » Wed Mar 14, 2018 6:24 pm

I bought a 3 year at 2.65% on 2/27/18. If I sold $1000 worth today, market price is $993.1167. Some of the shorter term CDs I have are worth more today than I paid. Guess it varies with interest rate speculation. Holding to term, so doesn't matter to me. This will give you an idea at least.

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Re: Liquidity/Sale of Brokered CD

Post by nisiprius » Wed Mar 14, 2018 6:31 pm

Spirit Rider wrote:
Wed Mar 14, 2018 5:56 pm
...Also. in a rising rate environment they tend to get hit much harder than bonds...
Why?
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Re: Liquidity/Sale of Brokered CD

Post by Spirit Rider » Wed Mar 14, 2018 7:53 pm

nisiprius wrote:
Wed Mar 14, 2018 6:31 pm
Spirit Rider wrote:
Wed Mar 14, 2018 5:56 pm
...Also. in a rising rate environment they tend to get hit much harder than bonds...
Why?
Securities with liquidity issues are more susceptible to transaction pressure on the spread. That tends to help the seller on buy pressure and hurt on sell pressure. No spreads with bond mutual funds and even if you are using mainstream bond ETFs, the spreads tend to be trivial.

stlutz
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Re: Liquidity/Sale of Brokered CD

Post by stlutz » Wed Mar 14, 2018 7:58 pm

dm200 I'd the only poster I've seen who has done it and paid close attention to pricing in doing so. You might try and see if you can find that post via a search

Another option would be to buy one and then turn around and sell it a few days later. Would make an interesting and helpful "case study" thread.

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Kevin M
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Re: Liquidity/Sale of Brokered CD

Post by Kevin M » Wed Mar 14, 2018 8:08 pm

Many CDs on secondary market do not display a bid price/yield, only an ask price/yield. At least this is what I see at Vanguard and Fidelity (I've been checking every day lately). When I have seen bid price/yield, I think the spreads have been on the order of 20-30 basis points, or even more. This is compared to maybe 10 bps or less for Treasuries.

I think you really need to check when market is open. I just looked at 3-year CDs at Vanguard and saw no bids, but looking at Fidelity I do some bids, and the spreads don't look as bad as I've seen. I think it also depends on what maturities you're looking at. For 5-year CDs at Fidelity, I see bid/ask yield spread as low as about 10 bps (3.05/2.95) and as high as about 30 bps (3.05/2.76).

The thing is that for the CD that you own, there may not be a bid displayed when you want to sell. In that case, you call your fixed-income desk and request them to solicit some bids. They then call you back a while later and present the offers to you, at which point you can decide to accept one or not. At least that's the way I did it some years ago.

I think it's a fair point that the bid/ask spreads you see now may not be representative of the ones that will exist for your CD during different conditions at some point in the future.

I would stick with Treasuries if you want liquidity, although you will sacrifice some yield beyond about 1-year maturity, unless this is in a taxable account in a high-tax state, in which case Treasuries could be competitive out to 5-year maturity.

Personally, I think the yield curve flattens out too much after 3-year maturity to justify going beyond that. You can probably can get a 3-year CD at about 2.8% (after commission, if you're patient and buying small quantities), and a 5-year at a little over 3%, so you only get about 10 bps per year to extend beyond three years. Looking just at new issues, you get 40 bps to extend from 1-year to 2-year, and 20 bps to extend from 2-year to 3-year and only 15 bps to extend from 3-year to 5-year (so 7.5 bps per year). So the yield curve is very steep out to 2-year maturity, and just barely reasonably steep out to 3-years, then not steep at all beyond that.

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Re: Liquidity/Sale of Brokered CD

Post by Kevin M » Wed Mar 14, 2018 8:13 pm

Spirit Rider wrote:
Wed Mar 14, 2018 7:53 pm
nisiprius wrote:
Wed Mar 14, 2018 6:31 pm
Spirit Rider wrote:
Wed Mar 14, 2018 5:56 pm
...Also. in a rising rate environment they tend to get hit much harder than bonds...
Why?
Securities with liquidity issues are more susceptible to transaction pressure on the spread. That tends to help the seller on buy pressure and hurt on sell pressure. No spreads with bond mutual funds and even if you are using mainstream bond ETFs, the spreads tend to be trivial.
We have been in generally a rising-rate environment for some months, so bid/ask spreads you see now, when you can see them at all, are representative of at least a somewhat rising-rate environment. It seems to me that CDs in the 2-3 year range have been increasing about 5 bps almost every week lately. What I think was a good deal I got on the secondary market a week ago becomes the new-issue yield this week.

Kevin
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Re: Liquidity/Sale of Brokered CD

Post by Spirit Rider » Wed Mar 14, 2018 8:38 pm

My original statement was imprecise. Transaction pressure is more time sensitive than a general trend.

You can have up days, hours, etc... in a down market and vice versa. You just have a higher incidence matching the trend.

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Re: Liquidity/Sale of Brokered CD

Post by Kevin M » Thu Mar 15, 2018 12:32 pm

Now that market is open, I'm seeing pretty much the same thing at Fidelity for 5-year CDs as last night. Of 13 CDs maturing between 03/2023 and 04/2023, only six display bids, and the bid/ask yield spreads range from about 10 bps to 30 bps. The top yield, excluding a CD with only 1 available, is 2.999% before commission (matures 3/14/23), which is 2.977% after commission, which is a little shy of 8 bps over the best new-issue yield of 2.90%.

Looking at a 3-year CD I own at Fidelity, I see a bid, and the bid/ask yield spread is a little over 30 bps (2.918/2.604). I bought this a couple of months ago at a yield of 2.565%, so not only has the ask yield increased by a few bps (price decreased), even as the maturity has declined a bit, but I'd lose more than 30 bps on top of that if I sold it. This is pretty much my rough expectation for secondary CDs, so I only buy when intending to hold to maturity.

Kevin
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Re: Liquidity/Sale of Brokered CD

Post by lahob » Fri Mar 16, 2018 2:50 pm

Kevin M wrote:
Thu Mar 15, 2018 12:32 pm
Looking at a 3-year CD I own at Fidelity, I see a bid, and the bid/ask yield spread is a little over 30 bps (2.918/2.604).
How does that compare to a typical early withdrawal penalty (6 months) on a direct CD?

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Re: Liquidity/Sale of Brokered CD

Post by Kevin M » Fri Mar 16, 2018 7:24 pm

lahob wrote:
Fri Mar 16, 2018 2:50 pm
Kevin M wrote:
Thu Mar 15, 2018 12:32 pm
Looking at a 3-year CD I own at Fidelity, I see a bid, and the bid/ask yield spread is a little over 30 bps (2.918/2.604).
How does that compare to a typical early withdrawal penalty (6 months) on a direct CD?
Good question, but the bid/ask spread isn't the thing I'm looking to hedge against with direct CD and a low EWP. The value of the low EWP is the hedge against a large increase in yields, which could have a much more significant impact on the value of the CD than the bid/ask spread.

As an example, consider a 5-year 3% CD with an EWP of six months of interest. This limits your downside to 1.5%, or 150 basis points, so much more than the 30 bps bid/ask spread, but much less than the potential drop in value if 5-year yields were to quickly increase to 4% after you bought the CD, in which case your loss would be 4-4.5%.

With the brokered CD there's not much point in selling then buying a higher yielding CD (unless you want to harvest the tax loss), since you won't end up earning any more over the original term, but with a direct CD you could.

And yields don't even have to generally increase for the EWP to be valuable--there just has to be a significantly better CD deal that comes along. Some people took advantage of their low EWP (or in some cases, no EWP) to break their lower-yielding CDs to buy a 5-year 4% CD that was available recently.

Unfortunately, the yield spread of good CDs over Treasuries of same maturities have narrowed tremendously, with Treasury yields having increased much more than CD rates, and EWPs generally have increased as well, and now usually are at least one year of interest. Treasuries have even higher yields than CDs out to 1-year maturity, and in a taxable account in a high-tax state can have higher taxable-equivalent yields out to five years.

Kevin
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