2-year CDs at Vanguard and Fidelity Today

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uberme
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by uberme » Fri Aug 10, 2018 9:48 am

Dumb question- do you guys prefer one over another in terms of New Issues or Secondary Issues (@ Fidelity)?
Haven't ever purchased a CD through a broker but looking to do so soon

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jeffyscott
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by jeffyscott » Fri Aug 10, 2018 9:56 am

Usually can get a little better net yield on secondary. You do have to adjust the YTM in secondary listings at Fidelity for the $1/$1000 commission, though. Secondary also can settle sooner (2 days), the new issues settle on whatever date is listed and that can be a week or more in some cases.
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likashing
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by likashing » Fri Aug 10, 2018 10:27 am

Accidentally bought a 01/06/2021 maturity @ 105.042 for 3.025978% effective yield. So it matures in 2.4 years. I read that FDIC only covers up to par. It is Transportation Alliance Bank. Deposit accounts show B+... Safe and Sound shows 5

Do you guys avoid buying above par?

https://www.depositaccounts.com/banks/tab-bank.html

protagonist
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Fri Aug 10, 2018 4:30 pm

1% difference means $100/year for 2-3 years per $10K invested. 0.1% is $10/year.
So unless you are investing large amounts in any given CD, differences of a few tenths of a percent are trivial. A few cups of coffee per year in a NYC coffee house.

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Kevin M
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Fri Aug 10, 2018 8:04 pm

likashing wrote:
Fri Aug 10, 2018 10:27 am
Accidentally bought a 01/06/2021 maturity @ 105.042 for 3.025978% effective yield. So it matures in 2.4 years. I read that FDIC only covers up to par. It is Transportation Alliance Bank. Deposit accounts show B+... Safe and Sound shows 5

Do you guys avoid buying above par?

https://www.depositaccounts.com/banks/tab-bank.html
Yes, I avoid buying above par. I bought a CD above par issued by a bank that failed not too long after I bought it, so I lost the amount above par. Fortunately it was a small amount of money, but lesson learned (many years ago).

Kevin
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protagonist
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Fri Aug 10, 2018 9:37 pm

Kevin M wrote:
Fri Aug 10, 2018 8:04 pm
likashing wrote:
Fri Aug 10, 2018 10:27 am
Accidentally bought a 01/06/2021 maturity @ 105.042 for 3.025978% effective yield. So it matures in 2.4 years. I read that FDIC only covers up to par. It is Transportation Alliance Bank. Deposit accounts show B+... Safe and Sound shows 5

Do you guys avoid buying above par?

https://www.depositaccounts.com/banks/tab-bank.html
Yes, I avoid buying above par. I bought a CD above par issued by a bank that failed not too long after I bought it, so I lost the amount above par. Fortunately it was a small amount of money, but lesson learned (many years ago).

Kevin
Is the opposite true? If you buy below par will FDIC reimburse you 100% of par? I would think so.

stlutz
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by stlutz » Fri Aug 10, 2018 10:38 pm

Do you guys avoid buying above par?
I set aside my hangup over buying a premium CD once I experienced CDs I was holding going up in price and becoming premium CDs. You buy your portfolio every day. If I would hold a CD that I bought for a 100 that is now trading at 102, there is no reason I shouldn't be willing to buy a new one at 102 today. If I wasn't, then I should sell the existing CD I have.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by gips » Sat Aug 11, 2018 8:40 am

Kevin M wrote:
Thu Aug 09, 2018 12:26 pm
gips wrote:
Wed Aug 08, 2018 8:35 pm
indeed, this week, just before we funded the justice fcu 24-month %3.354 cd along comes the freedom fcu 30-month %3.56 offer. we changed gears, and hope to have that funded tomorrow. still, as I look at some of the low rates in our cd ladder (1.4%, 2%, etc), I wonder, even with the loss of principal in the face of rising interest rates, if BND might have offered a better return. I suppose I should figure that out...
Whenever you bought your CDs, the Treasuries in BND were yielding about the same or less for the same maturities (if not, you should have bought individual Treasuries instead of the CDs). Both BND and the CDs you bought have experienced losses, but the BND losses probably are larger, considering the duration of about 6 years.

The 2-year CDs you are buying now have yields much higher than the 2-year Treasuries held by BND--especially if the state income tax exemption for Treasuries is not a factor for you. If you want to take much more term risk, as you would be doing with BND, you can buy longer-maturity CDs, and earn even larger yield premiums--at least looking at brokered CDs. But the 2-year CD you bought at 3.35% has the yield of a 5-year brokered CD, which is significantly higher than the 5-year Treasury yield at about 2.8%, which is what BND would be holding. A 10-year brokered CD yields 3.75% compared to about 2.9% for the 10-year Treasury BND would be holding.

Kevin
thanks kevin, that's a good way of looking at it. so if that's the case, why would one ever purchase BND over CD/treasuries (other than simplicity)? Perhaps exposure to securities with higher credit risk and accordant higher rates?

In any case, I continue to believe interest rates will increase, bond funds will shed principal and the cd market is not as efficient as the broader equity or fixed income market.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by gips » Sat Aug 11, 2018 8:47 am

protagonist wrote:
Fri Aug 10, 2018 9:37 pm

Is the opposite true? If you buy below par will FDIC reimburse you 100% of par? I would think so.
well there's an interesting thought! purchase secondary cds far below par from banks that may fail.

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Kevin M
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Aug 11, 2018 12:41 pm

gips wrote:
Sat Aug 11, 2018 8:40 am
thanks kevin, that's a good way of looking at it. so if that's the case, why would one ever purchase BND over CD/treasuries (other than simplicity)? Perhaps exposure to securities with higher credit risk and accordant higher rates?
I personally don't hold BND or equivalents, since I usually can earn higher yields with CDs than on many of the BND Treasury holdings, I can get exposure to credit risk with a corporate or investment-grade fund with no or much less Treasuries, and I can hold individual Treasuries or Treasury funds to target the Treasury maturities I'm interested in (currently 2-year maturity or less in taxable accounts).

Reasons for others to hold BND or an equivalent are simplicity, lack of access to good alternatives (e.g., in a 401k), or just that holding something close to the total US bond market (with notable exceptions) is one's preference.
In any case, I continue to believe interest rates will increase, bond funds will shed principal and the cd market is not as efficient as the broader equity or fixed income market.
If you believe rates in general will increase, then sticking with shorter-term maturities makes sense. I have little confidence in my ability to predict future interest rates, since no one seems to be very good at it, but am sticking with shorter-term fixed-income with new cash due to the shape of the yield curve, and the desire to be adequately compensated for taking term risk.

I don't know if the term "not as efficient" is quite right, but clearly CDs sometimes offer significant yield premiums over Treasuries of same maturities, so can be a good deal for retail investors who can take advantage of the FDIC/NCUA deposit insurance. However, currently Treasuries are competitive with brokered CDs in an IRA out to 1-year maturity, and for me in a taxable account out to 3-year maturity, but this doesn't include the best direct CD deals that seem to be popping up more now.

Still, we've essentially lost money on CDs we bought a few months ago, just as we've lost money on bond fund shares we bought a few months ago, but not as much if we kept CD maturities shorter than the average maturity/duration of whatever bond fund we're comparing to.

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Kevin M
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Aug 11, 2018 1:04 pm

stlutz wrote:
Fri Aug 10, 2018 10:38 pm
I set aside my hangup over buying a premium CD once I experienced CDs I was holding going up in price and becoming premium CDs. You buy your portfolio every day. If I would hold a CD that I bought for a 100 that is now trading at 102, there is no reason I shouldn't be willing to buy a new one at 102 today. If I wasn't, then I should sell the existing CD I have.
It's a good point, but one difference is that it very well could cost you 1-2% in bid/ask spread to sell your CD, so there is a bit of a difference between buying at 102 ask and selling at 102 bid.

I'd refine my answer a bit to say that if you buy at a premium, perhaps do a bit more due diligence regarding the bank's financial health. In my case, I didn't do that, and bought a CD issued by a bank that was obviously at risk.

Kevin
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sport
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by sport » Sat Aug 11, 2018 1:58 pm

Kevin,
A related question: When you buy brokered CDs, do you care about which bank issued them? When looking at the offerings, I see a lot of US subsidiaries of foreign banks, and a number of smaller or newer domestic banking companies. I am aware that they are all FDIC insured. Nevertheless, are you just as comfortable with a bank owned by a company in Spain, Japan, France, Israel, Venezuela, etc. as you are with Citibank, or Morgan Stanley, or Wells Fargo?

I also note that a lot of larger US banks do not seem to be using brokered CDs. In my area there are Huntington Banks, PNC Banks, US Banks. It seems that these banks are able to obtain all the money they need locally. What does this say, if anything, about the banks that need to go to brokers to get the deposits they need? Does this mean anything, and is it important?

Thanks for your insight.

stlutz
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by stlutz » Sat Aug 11, 2018 4:05 pm

I'd refine my answer a bit to say that if you buy at a premium, perhaps do a bit more due diligence regarding the bank's financial health. In my case, I didn't do that, and bought a CD issued by a bank that was obviously at risk.
+1.

And I should say that I always buy the lowest priced CD all other things being equal. The other [small] advantage to discount ones is that you can defer the taxes on the market discount income until maturity.

Right now there are a lot of discount CDs out there. I've also bought at times when there weren't.

likashing
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by likashing » Sat Aug 11, 2018 4:32 pm

stlutz wrote:
Sat Aug 11, 2018 4:05 pm
I'd refine my answer a bit to say that if you buy at a premium, perhaps do a bit more due diligence regarding the bank's financial health. In my case, I didn't do that, and bought a CD issued by a bank that was obviously at risk.
+1.

And I should say that I always buy the lowest priced CD all other things being equal. The other [small] advantage to discount ones is that you can defer the taxes on the market discount income until maturity.

Right now there are a lot of discount CDs out there. I've also bought at times when there weren't.
All great points. Thanks Kevin and stlutz.

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Kevin M
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Aug 11, 2018 8:59 pm

sport wrote:
Sat Aug 11, 2018 1:58 pm
Kevin,
A related question: When you buy brokered CDs, do you care about which bank issued them? When looking at the offerings, I see a lot of US subsidiaries of foreign banks, and a number of smaller or newer domestic banking companies. I am aware that they are all FDIC insured. Nevertheless, are you just as comfortable with a bank owned by a company in Spain, Japan, France, Israel, Venezuela, etc. as you are with Citibank, or Morgan Stanley, or Wells Fargo?
For whatever reason, the best secondary CD deals I was finding when I was last actively buying were almost all from big-name US banks, so I really didn't pay much attention to the bank, other than with respect to FDIC insurance limits. Since I've bought most of my brokered CDs in IRAs, there's no way around the $250K limit, as there is in taxable accounts. And you must combine direct CDs with brokered CDs with respect to FDIC coverage, so that's something I pay attention to.

Having said that, I don't think I'd worry much about the bank as long as it's FDIC insured, and I don't think Vanguard or Fidelity offer any CDs that aren't (I've never seen any). Again, the exception would be if paying a significant premium over par, in which case it's probably prudent to take a closer look. All the secondary CDs I bought since late last year were purchased at a discount.
I also note that a lot of larger US banks do not seem to be using brokered CDs. In my area there are Huntington Banks, PNC Banks, US Banks. It seems that these banks are able to obtain all the money they need locally. What does this say, if anything, about the banks that need to go to brokers to get the deposits they need? Does this mean anything, and is it important?

Thanks for your insight.
I have no idea. One thing that's interesting is that Wells Fargo has consistently been offering 2-year and 3-year CDs with the top rates, yet I believe if you buy a CD directly from Wells Fargo you'll get a pretty horrible rate. I think that tends to be true of other banks lately too--better brokered CD rates than direct CD rates, although I recall that being just the opposite in the past.

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gips
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by gips » Sun Aug 12, 2018 9:13 am

Kevin M wrote:
Sat Aug 11, 2018 12:41 pm
In any case, I continue to believe interest rates will increase, bond funds will shed principal and the cd market is not as efficient as the broader equity or fixed income market.
If you believe rates in general will increase, then sticking with shorter-term maturities makes sense. I have little confidence in my ability to predict future interest rates, since no one seems to be very good at it, but am sticking with shorter-term fixed-income with new cash due to the shape of the yield curve, and the desire to be adequately compensated for taking term risk.
I'm not as sure as I once was that interest rates would rise (it seemed obvious with the fed manipulating historically low rates) but I'm doing my best to stick to <= 2-year terms. In the end, this could be a costly mistake but I'm guessing in another year, 4% for a 2-year term will be more common. still, if equity returns fall to say 4% nominal, which is quite possible, I suppose cd rates would probably decline. sigh. I guess the best we can do is stick with an asset allocation that makes sense for each of us.
Kevin M wrote:
Sat Aug 11, 2018 12:41 pm
I don't know if the term "not as efficient" is quite right, but clearly CDs sometimes offer significant yield premiums over Treasuries of same maturities, so can be a good deal for retail investors who can take advantage of the FDIC/NCUA deposit insurance.
yes, "efficient" is probably not the right term. My thinking is that the bulk of treasuries are held by institutions and governments. Interest rate predictions/news is efficiently priced into the instrument. While CD rates are certainly tied to prevailing interest rates, it seems to me they also reflect the issuer's need for cash/business/members. How else to explain outliers like Sharonview's 4% offering or achieva's 4.2% ira cd?

thanks for starting this thread and your continuing contributions.

best,

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by jeffyscott » Sun Aug 12, 2018 9:33 am

gips wrote:
Sun Aug 12, 2018 9:13 am
yes, "efficient" is probably not the right term. My thinking is that the bulk of treasuries are held by institutions and governments. Interest rate predictions/news is efficiently priced into the instrument. While CD rates are certainly tied to prevailing interest rates, it seems to me they also reflect the issuer's need for cash/business/members. How else to explain outliers like Sharonview's 4% offering or achieva's 4.2% ira cd?
I would think the the outliers are just loss leaders to try to attract new customers. This is the same way I would explain Fidelity offering index funds with 0% ER and credit cards giving me $150-$1000 in cash or points for signing up and spending $500-$4000.

Aside from the outliers, I think the higher rates on CDs is partly a liquidity premium. It may also be partly an inconvenience premium in that large investors need to watch the $250K per bank limit and it is an added hassle to transfer money around in search of the best deals for all investors in direct CDs.
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uberme
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by uberme » Sun Aug 12, 2018 11:35 am

I'm looking at the CD rates for new issue @ Fidelity and just doesn't seem worth it compared to the MM which has a 7 day yield of around 1.55%.
3 month = 1.9%, 6m = 2%, 9m = 2.1%, 12m = 2.45%
Maybe I'm missing something given rates are rising. I guess the FDIC is a big component but don't see a MM breaking the buck.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 11:41 am

uberme wrote:
Sun Aug 12, 2018 11:35 am
I'm looking at the CD rates for new issue @ Fidelity and just doesn't seem worth it compared to the MM which has a 7 day yield of around 1.55%.
3 month = 1.9%, 6m = 2%, 9m = 2.1%, 12m = 2.45%
Maybe I'm missing something given rates are rising. I guess the FDIC is a big component but don't see a MM breaking the buck.
First, that's a lousy money market yield--Fidelity's MM funds generally have lower yields than Vanguard's counterparts, but you can even do better at Fidelity with SPRXX at 1.83%. Vanguard Prime MM yield is 2.05%, so even a higher hurdle to clear before getting to CD maturities that are worth it.

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Consider that the MM fund now at 1.55% must average 2.45% over the next year to match the 1-year return of the 1-year CD. I believe that would require a steady climb to 3.35% in one year, for example, which is 1.8 percentage points higher than the current yield. Assuming the MM fund yield increases in line with future Fed rate hikes, that's much higher than I'd expect to see in one year.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by jeffyscott » Mon Aug 13, 2018 11:55 am

uberme wrote:
Sun Aug 12, 2018 11:35 am
I'm looking at the CD rates for new issue @ Fidelity and just doesn't seem worth it compared to the MM which has a 7 day yield of around 1.55%.
3 month = 1.9%, 6m = 2%, 9m = 2.1%, 12m = 2.45%
Maybe I'm missing something given rates are rising. I guess the FDIC is a big component but don't see a MM breaking the buck.
Also most of those are lower than Treasury yields. For example you should get about 2.23% on 6 month Treasury. I just did.

CDs make more sense at about 2 year maturity or longer.
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Kevin M
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 1:00 pm

jeffyscott wrote:
Mon Aug 13, 2018 11:55 am
CDs make more sense at about 2 year maturity or longer.
Agreed--at least in terms of yield, and in an IRA or if you pay little or no state income tax.

Some will still prefer Treasuries at lower yields than CDs due to much better liquidity, and possible negative correlation when stocks tank.

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

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Riley15
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Riley15 » Mon Aug 13, 2018 4:23 pm

Kevin M wrote:
Mon Aug 13, 2018 1:00 pm

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

Kevin

The yield curve will always be relatively flat or flat in a rising or high interest rate environment. At what point is it a good idea to lock in those long-term CD rates?

There is always the risk that short term rates will have to come down again if the economy lags. If you're in 1-2 year CD's when that happens then we might not have a chance to lock in those longer term rates?

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Mon Aug 13, 2018 6:54 pm

Kevin M wrote:
Mon Aug 13, 2018 11:41 am

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Kevin
The only good rationale I can think of for holding money in a MM fund vs a CD offering a better yield is liquidity- what you might need in case of emergency. If you are certain you don't need the money for a year, there is no reason I can think of for choosing a MM fund over a 1 year CD if the 1 year CD offers a better yield, other than possibly convenience.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 7:15 pm

Riley15 wrote:
Mon Aug 13, 2018 4:23 pm
Kevin M wrote:
Mon Aug 13, 2018 1:00 pm

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

Kevin
The yield curve will always be relatively flat or flat in a rising or high interest rate environment. At what point is it a good idea to lock in those long-term CD rates?

There is always the risk that short term rates will have to come down again if the economy lags. If you're in 1-2 year CD's when that happens then we might not have a chance to lock in those longer term rates?
Yes, in requiring what I consider to be adequate compensation for taking on extra term risk, I'm more subject to reinvestment risk. However, I still have some longer-term direct CDs, and some intermediate-term bond funds, which somewhat offset the extra reinvestment risk. Note that in what you quoted I am talking only about what I'm doing with new cash.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Aug 13, 2018 7:27 pm

protagonist wrote:
Mon Aug 13, 2018 6:54 pm
Kevin M wrote:
Mon Aug 13, 2018 11:41 am

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Kevin
The only good rationale I can think of for holding money in a MM fund vs a CD offering a better yield is liquidity- what you might need in case of emergency. If you are certain you don't need the money for a year, there is no reason I can think of for choosing a MM fund over a 1 year CD if the 1 year CD offers a better yield, other than possibly convenience.
One reason is that you believe that MM or savings account rates will increase enough in one year to average higher than a 1-year CD or Treasury. Unlikely at 1.55%, more likely at 2.06% or 2.15% (TEY of Vanguard Treasury MM fund for me now is 2.15%), and even more likely at the 2.50% I'm earning in a local savings account (guaranteed through 12/31/2019). Of course the latter case is an exception to your qualification of the 1-year CD at 2.45% offering better yield than a money market fund, but TEY of a 1-year Treasury for me is about 2.7%.

Kevin
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Riley15 » Mon Aug 13, 2018 7:38 pm

Kevin M wrote:
Mon Aug 13, 2018 7:15 pm
Riley15 wrote:
Mon Aug 13, 2018 4:23 pm
Kevin M wrote:
Mon Aug 13, 2018 1:00 pm

Treasuries have higher taxable-equivalent yield (TEY) for me at 2-year maturity, and are pretty much tied with CDs at 3-year maturity, so I would favor Treasuries out to 3-year maturity in a taxable account. However, I am not going further out than 2-year maturity in taxable with new cash due to relatively flat yield curve beyond that.

Kevin
The yield curve will always be relatively flat or flat in a rising or high interest rate environment. At what point is it a good idea to lock in those long-term CD rates?

There is always the risk that short term rates will have to come down again if the economy lags. If you're in 1-2 year CD's when that happens then we might not have a chance to lock in those longer term rates?
Yes, in requiring what I consider to be adequate compensation for taking on extra term risk, I'm more subject to reinvestment risk. However, I still have some longer-term direct CDs, and some intermediate-term bond funds, which somewhat offset the extra reinvestment risk. Note that in what you quoted I am talking only about what I'm doing with new cash.

Kevin

I am in a similar situation although I have some long term CD's most of my funds are in short term Savings/MM. It's a matter of time when it will become cost-effective to break the long term CD's for reinvestment into higher rate CD's. This here is my dilemma, if I am breaking a 5 year CD should I re-open another 5 year CD at the higher rate or open shorter term 1-2 year CD since the yield curve is near flat. If I am not replacing the long term 5 year CD's I will pretty much end up with 1-2 year CD ladder.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by protagonist » Mon Aug 13, 2018 9:46 pm

Kevin M wrote:
Mon Aug 13, 2018 7:27 pm
protagonist wrote:
Mon Aug 13, 2018 6:54 pm
Kevin M wrote:
Mon Aug 13, 2018 11:41 am

One guideline is to extend maturity if you can earn an extra 20 basis points per extra year of maturity. With your MM fund at 1.55%, even the 3-month CD yield of 1.9% clears that hurdle by a lot. With a MM fund yield of 2.05%, the 1-year at 2.45% gives one 40 basis points of extra yield for extending maturity from 0-year to 1-year, so many would consider that worth it.

Kevin
The only good rationale I can think of for holding money in a MM fund vs a CD offering a better yield is liquidity- what you might need in case of emergency. If you are certain you don't need the money for a year, there is no reason I can think of for choosing a MM fund over a 1 year CD if the 1 year CD offers a better yield, other than possibly convenience.
One reason is that you believe that MM or savings account rates will increase enough in one year to average higher than a 1-year CD or Treasury. Unlikely at 1.55%, more likely at 2.06% or 2.15% (TEY of Vanguard Treasury MM fund for me now is 2.15%), and even more likely at the 2.50% I'm earning in a local savings account (guaranteed through 12/31/2019). Of course the latter case is an exception to your qualification of the 1-year CD at 2.45% offering better yield than a money market fund, but TEY of a 1-year Treasury for me is about 2.7%.

Kevin
Good point, Kevin.

Then again, a couple of years ago I put a fair amount of money into a 5 year CD at 2.57%, and more recently 5 year CDs around 3%, which was the best rate I could get at the time. So I am not sure I can trust my guessing abilities regarding the course of interest rates projecting 5 years into the future, at least enough to base my present investment decisions on my guesses. In fact, I fully expect rates to continue to rise over the next few years. That is keeping me from investing in bonds. But I am still buying into CDs at the best available rates now, rather than staying in MM accounts, waiting it out and hoping I am right.

Ultimately, in the words of the Firesign Theatre, we are all just bozos on this bus.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Tue Aug 14, 2018 1:51 pm

Riley15 wrote:
Mon Aug 13, 2018 7:38 pm
I am in a similar situation although I have some long term CD's most of my funds are in short term Savings/MM. It's a matter of time when it will become cost-effective to break the long term CD's for reinvestment into higher rate CD's. This here is my dilemma, if I am breaking a 5 year CD should I re-open another 5 year CD at the higher rate or open shorter term 1-2 year CD since the yield curve is near flat. If I am not replacing the long term 5 year CD's I will pretty much end up with 1-2 year CD ladder.
Why are you worrying about breaking 5-year CDs with most of your funds in savings/MM? Instead, why not start deploying some of the cash into CDs and/or Treasuries, depending on maturity, type of account, and state income tax rate, with maturities in the 1-year to 3-year range, where the yield curve is reasonably steep if not very steep? Then just hold the 5-year CDs to hedge against reinvestment risk.

Unless your 5-year CD rates are very low, it's unlikely that you'll come out ahead breaking, paying the penalty, and reinvesting in a 2-year CD. I'm holding my 5-year (or longer) direct CDs until it becomes a no-brainer to break them to reinvest in a higher-yielding 5-year CD (or Treasury).

You could continue to hold some cash, and consider it the 0-year rung of your ladder. The higher the rate you can get on MM or savings, the more cash it might be worthwhile to hold.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Riley15 » Tue Aug 14, 2018 4:39 pm

Kevin M wrote:
Tue Aug 14, 2018 1:51 pm
Riley15 wrote:
Mon Aug 13, 2018 7:38 pm
I am in a similar situation although I have some long term CD's most of my funds are in short term Savings/MM. It's a matter of time when it will become cost-effective to break the long term CD's for reinvestment into higher rate CD's. This here is my dilemma, if I am breaking a 5 year CD should I re-open another 5 year CD at the higher rate or open shorter term 1-2 year CD since the yield curve is near flat. If I am not replacing the long term 5 year CD's I will pretty much end up with 1-2 year CD ladder.
Why are you worrying about breaking 5-year CDs with most of your funds in savings/MM? Instead, why not start deploying some of the cash into CDs and/or Treasuries, depending on maturity, type of account, and state income tax rate, with maturities in the 1-year to 3-year range, where the yield curve is reasonably steep if not very steep? Then just hold the 5-year CDs to hedge against reinvestment risk.

Unless your 5-year CD rates are very low, it's unlikely that you'll come out ahead breaking, paying the penalty, and reinvesting in a 2-year CD. I'm holding my 5-year (or longer) direct CDs until it becomes a no-brainer to break them to reinvest in a higher-yielding 5-year CD (or Treasury).

You could continue to hold some cash, and consider it the 0-year rung of your ladder. The higher the rate you can get on MM or savings, the more cash it might be worthwhile to hold.

Kevin
Thanks Kevin! That's a valid point. I have 5 year CD's from 2 years ago paying only about 2.0%, not a great hedge against reinvestment. This is about the same as Savings/MM rate I am getting now. So I will have to break these CD's sooner or later, I don't think it really makes a difference as to when I break them as long as I get a higher rate whether it's 1-2 year CD's or another 5 year CD. Even if I break them to open 1-2 year CD's I am expecting the rates will be higher when they mature for reinvestment.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Tue Aug 14, 2018 6:20 pm

Riley15 wrote:
Tue Aug 14, 2018 4:39 pm
Thanks Kevin! That's a valid point. I have 5 year CD's from 2 years ago paying only about 2.0%, not a great hedge against reinvestment. This is about the same as Savings/MM rate I am getting now. So I will have to break these CD's sooner or later, I don't think it really makes a difference as to when I break them as long as I get a higher rate whether it's 1-2 year CD's or another 5 year CD. Even if I break them to open 1-2 year CD's I am expecting the rates will be higher when they mature for reinvestment.
So you essentially have 3-year CDs at 2%. New-issue 3-year brokered CD yield is 3.00%, and you probably can get 3.1% on secondary market. If your early withdrawal penalty (EWP) is six months of interest, you lose 1% to break, which you'll earn back in one year at 3%, and then you earn the higher rate for the next two years. If your EWP is one year of interest, it will take about two years to earn back the 2% penalty at 3%, then you profit from the higher rate in the last year. Either way, you end up better off breaking the CDs and reinvesting in 3-year CDs.

If your EWP is more than one year of interest, you need to do the calculation to see if it's worth it.

You can probably do even better with a direct CD, especially if you are willing to join a credit union, but of course that is extra work, and you should be sure to read the reviews so you know what you're getting into: https://www.depositaccounts.com/cd/3-year-cd-rates.html.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Wed Sep 12, 2018 8:04 pm

Earlier today I noticed that the top 2-year CD rates at Vanguard and Fidelity had risen to 2.85%. This is the first 2-year CD rate bump we've seen in weeks. As I was about to post this rate in another thread, I checked and saw that the top rate now is 2.90%.

The 2.85% is offered by Morgan Stanley at both Fidelity and Vanguard, and also by WebBank at Fidelity. The 2.90% is offered by Wells Fargo at both. WF seems to want to maintain its position as the brokered CD rate leader.

Note that the 2.90% CDs settle 9/28, while the 2.85% CDs settle 9/21.

Note that the 2-year Treasury yield has increased 20 basis points in the last three months, from 2.54% on 6/12 to 2.74% today (using Treasury.gov yields). So the top 2-year CD has a yield premium of about 15 basis points in an IRA or in a state with no income tax. The 2-year Treasury still has higher TEY for me in a taxable account, at about 3.08%.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by jmk » Wed Sep 12, 2018 10:25 pm

Kevin M wrote:
Wed Sep 12, 2018 8:04 pm
I checked and saw that the top rate now is 2.90%.
Which comes to about a 2.85% APY (if you store coupon payments in Prime Money market), higher than the current 2y bank CDs by about 0.1%.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Thu Sep 13, 2018 1:51 pm

jmk wrote:
Wed Sep 12, 2018 10:25 pm
Kevin M wrote:
Wed Sep 12, 2018 8:04 pm
I checked and saw that the top rate now is 2.90%.
Which comes to about a 2.85% APY (if you store coupon payments in Prime Money market), higher than the current 2y bank CDs by about 0.1%.
Actually, assuming semi-annual coupons are reinvested at the current Prime MM yield of 2.09%, I come up with an annualized return of 2.904%. If the coupons were reinvested at the coupon rate of 2.90%, the APY would be 2.921%.

The reason for this is that brokered CD and bond yields are stated as bond-equivalent yield (BEY), which does not assume reinvestment of coupons semi-annually (or whatever the coupon payment period is if less than one year). For example, for semi-annual coupons, the semi-annual yield is calculated and then doubled to get BEY.

I believe Wells Fargo CDs pay interest monthly, so the APY probably is even a little higher.

Also, we don't know what Prime MM will be paying over the next two years, but given the current Fed plans to increase the federal funds rate, I'd guess that it will average significantly higher than 2.09% over the next two years.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by jmk » Thu Sep 13, 2018 10:57 pm

Kevin M wrote:
Thu Sep 13, 2018 1:51 pm
jmk wrote:
Wed Sep 12, 2018 10:25 pm
Kevin M wrote:
Wed Sep 12, 2018 8:04 pm
I checked and saw that the top rate now is 2.90%.
Which comes to about a 2.85% APY (if you store coupon payments in Prime Money market), higher than the current 2y bank CDs by about 0.1%.
Actually, assuming semi-annual coupons are reinvested at the current Prime MM yield of 2.09%, I come up with an annualized return of 2.904%. If the coupons were reinvested at the coupon rate of 2.90%, the APY would be 2.921%.
Maybe my math is wrong but at 2.1% for MM and assuming $10 commision, I get

Code: Select all

date  		days	 coupon		fv		years to maturity (act/365)
3/28/2019	181	 $143.81 	$148.43 	1.51
9/28/2019	184	 $146.19 	$149.30 	1.00
3/28/2020	182	 $144.60 	$146.14 	0.50
9/28/2020	184	 $146.19 	$146.19 	0.00
						=$590.06
Or (10590/10010) ^ (1/2.003) -1 = 2.853% (a little more if don't use act/365).

If coupon were reinvested at 2.9% (nominal) then I get 2.87%.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by jeffyscott » Fri Sep 14, 2018 7:40 am

jmk wrote:
Thu Sep 13, 2018 10:57 pm
and assuming $10 commision
There is no commission, the 2.9% is a new issue.

Secondaries would have commission, but typically can be found with better yields (net of commission) than new issues.
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Fri Sep 14, 2018 12:53 pm

jeffyscott wrote:
Fri Sep 14, 2018 7:40 am
jmk wrote:
Thu Sep 13, 2018 10:57 pm
and assuming $10 commision
There is no commission, the 2.9% is a new issue.
Exactly. If you modify your equation accordingly,

2.903% = (10590/10000) ^ (1/2.003) -1

I used a slightly cruder but simpler method to calculate the cumulative reinvested coupon values--something that #Cruncher shared with us (and I base all calculations on price=100 instead of actual bond value).

5.89 =FV(2.09%/2,2*2,-2.9/2,0)

This assumes semi-annual coupons. If you switch the 2 to 12 in the FV formula for monthly coupons, which I think the WF CDs offer, you get 5.92 in coupons, increasing return to 2.916%
Secondaries would have commission, but typically can be found with better yields (net of commission) than new issues.
I found this to be true much of the time but not all of the time for 2-year CDs when I was actively buying them over a period of several months. But this was at Fidelity and $1 commission. Sometimes the same deals would not be available at Vanguard, and even if they were, if you're at the $2 commission level, it was much less likely to beat the new-issue yield.

Even though you might not find a better deal on a 2-year CD, you might find one on a 1.8-year or 2.3-year CD, for example. Looking on the secondary market gives you the choice to tweak your maturity for a better deal.

I almost always found 3-year secondary CDs at Fidelity at about 10 basis points higher, after commission, than new-issue. At longer maturities it's easier to beat new issues, since the commission is amortized over a longer period of time.

Finally, the best secondary deals often are for small quantities, even as small as 1 ($1,000 face), so it might not be worth messing around with the highest yield.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by mc7 » Fri Sep 14, 2018 12:58 pm

I was looking at two-year CDs recently, but the 3.25% fifteen-month special at NASA Federal Credit Union was too good to pass up (and apparently still available).

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by RetiredTrvl » Sat Sep 15, 2018 3:25 pm

Kevin M wrote:
Thu Sep 13, 2018 1:51 pm

I believe Wells Fargo CDs pay interest monthly, so the APY probably is even a little higher.
Kevin
Indeed they do. I have recently started buying WF 2 yr CDs using money from maturing Ally CDs. Now that I am getting monthly interest from the WF CDs, I am combining that with new money that I want to invest and buying more 2 yr CDs so the interest is going back into another 2.8% CD within a couple of weeks.

I have this thread to thank for this strategy!

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sat Sep 15, 2018 4:05 pm

RetiredTrvl wrote:
Sat Sep 15, 2018 3:25 pm
Kevin M wrote:
Thu Sep 13, 2018 1:51 pm

I believe Wells Fargo CDs pay interest monthly, so the APY probably is even a little higher.
Kevin
Indeed they do. I have recently started buying WF 2 yr CDs using money from maturing Ally CDs. Now that I am getting monthly interest from the WF CDs, I am combining that with new money that I want to invest and buying more 2 yr CDs so the interest is going back into another 2.8% CD within a couple of weeks.
Except that you'll get 2.90% instead of 2.80%. Since this CD doesn't settle until 9/28, that might fit within your 2-week timeframe. If you can get the money into your settlement fund by 9/28, you could enter the order for the CD at any time before that (before they sell out). If a higher rate comes along before then, I believe you could cancel your order and replace it with an order at the higher rate.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Ricchan » Sun Sep 16, 2018 12:35 pm

Kevin M wrote:
Sat Sep 15, 2018 4:05 pm
If a higher rate comes along before then, I believe you could cancel your order and replace it with an order at the higher rate.
I was actually checking that out yesterday after having placed a buy order for "WELLS FARGO BANK NA SIOUX FALLS SD CD FDIC #03511 2.9% 09/28/20 09/28/18" the day before. I went to my Order Status page, and there was no Cancel or Change action available for that order. Would there be some other way to cancel a buy order for a CD? (This is at Vanguard.)

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Sun Sep 16, 2018 2:45 pm

Ricchan wrote:
Sun Sep 16, 2018 12:35 pm
Kevin M wrote:
Sat Sep 15, 2018 4:05 pm
If a higher rate comes along before then, I believe you could cancel your order and replace it with an order at the higher rate.
I was actually checking that out yesterday after having placed a buy order for "WELLS FARGO BANK NA SIOUX FALLS SD CD FDIC #03511 2.9% 09/28/20 09/28/18" the day before. I went to my Order Status page, and there was no Cancel or Change action available for that order. Would there be some other way to cancel a buy order for a CD? (This is at Vanguard.)
Thanks for sharing that. I've noticed that Fidelity seems to have a more liberal policy than Vanguard with respect to canceling orders, so perhaps it can be done at Fidelity but not at Vanguard. Fidelity also allows minimum quantity of 1 for new-issue CDs, while at Vanguard it's 10 (true for this particular CD, and I recall seeing this before).

If you can't cancel the order at Vanguard, then you might want to hold off entering the order in case the rate increases before the trade date (generally 2-3 days before settlement date), but keep an eye on the quantity available, which currently is 7,104 at Vanguard and 58,945 at Fidelity for this CD. But if the current batch sells out at Vanguard well before the settlement date, WF may provide more to Vanguard.

It does seem a bit strange though, since you can generally cancel an order for a brokered product until the order is filled. Maybe you can check again when the market is open.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by sport » Sun Sep 16, 2018 3:10 pm

If you cannot cancel an order on-line, perhaps a phone call will do the job.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Ricchan » Mon Sep 17, 2018 8:58 am

Kevin M wrote:
Sun Sep 16, 2018 2:45 pm
Maybe you can check again when the market is open.
It doesn't seem to be an option during market open hours either (checked just now).
sport wrote:
Sun Sep 16, 2018 3:10 pm
If you cannot cancel an order on-line, perhaps a phone call will do the job.
I may end up doing this. Besides possible higher CD rates, the upcoming 2 year treasury note auction on 9/24 may also have a decent rate.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Sep 17, 2018 1:35 pm

There is a 2-year available on secondary market now at 2.956% at Vanguard and 2.957% at Fidelity. At Fidelity, or at Vanguard if at $1/CD commission level, this comes to slightly over 2.90% after commission, and matures 9/14/2020 (vs. 9/28/2020 for new issue). This is a good choice if you want a slightly better deal and quicker (T+2) settlement (so would settle 9/19 if you bought today). Quantity 500, minimum quantity 1.

Quantity of the new-issue 2.90% is down to 4,848 at Vanguard.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by RetiredTrvl » Mon Sep 17, 2018 4:32 pm

Kevin M wrote:
Sat Sep 15, 2018 4:05 pm
If you can get the money into your settlement fund by 9/28, you could enter the order for the CD at any time before that (before they sell out). If a higher rate comes along before then, I believe you could cancel your order and replace it with an order at the higher rate.

Kevin
I tried doing this and Vanguard cancelled the order about an hour later so it seems like you have to have money already in your account to cover the order at the time you place it. I will have the money in the account by the 22nd but will need Vanguard to remove the 7 day hold at about day 5.. the WF 2 yr CDs seem to be selling fast though - they may not be any by the end of the week.
Ricchan wrote:
Sun Sep 16, 2018 12:35 pm

I was actually checking that out yesterday after having placed a buy order for "WELLS FARGO BANK NA SIOUX FALLS SD CD FDIC #03511 2.9% 09/28/20 09/28/18" the day before. I went to my Order Status page, and there was no Cancel or Change action available for that order. Would there be some other way to cancel a buy order for a CD? (This is at Vanguard.)
I have a pending order for a transfer from my Vanguard settlement account to Prime MM and it shows a cancel option. Maybe they only have the cancel option for Vanguard funds.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Ricchan » Mon Sep 17, 2018 6:11 pm

Thanks, Kevin, for looking into and sharing info about the secondary market CDs.
RetiredTrvl wrote:
Mon Sep 17, 2018 4:32 pm
I have a pending order for a transfer from my Vanguard settlement account to Prime MM and it shows a cancel option. Maybe they only have the cancel option for Vanguard funds.
Yes, I've always had the option to cancel mutual fund orders after placing them as long as they hadn't been executed yet. It seems CDs are treated differently. I also remember not too long ago I had placed a treasury auction order and later wanted to increase the amount, and found I couldn't cancel or change the existing order. (I ended up placing another order for the same treasury auction.)

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Mon Sep 17, 2018 7:22 pm

RetiredTrvl wrote:
Mon Sep 17, 2018 4:32 pm
Kevin M wrote:
Sat Sep 15, 2018 4:05 pm
If you can get the money into your settlement fund by 9/28, you could enter the order for the CD at any time before that (before they sell out). If a higher rate comes along before then, I believe you could cancel your order and replace it with an order at the higher rate.
I tried doing this and Vanguard cancelled the order about an hour later so it seems like you have to have money already in your account to cover the order at the time you place it.
OK, it may be that you must have enough money in the account to cover the purchase, but not necessarily in the settlement fund.

I recall once that something like this happened in my mom's account, for which I'm an agent. I may even have already initiated the transfer into the account from an external bank. I called Vanguard, and after discussing it with them, they overrode the system and re-entered the order. They said they consider a number of factors in making these decisions, so if you have enough money in other funds or brokered products to cover the purchase, you might want to call them to see if they can override the cancellation.
I will have the money in the account by the 22nd but will need Vanguard to remove the 7 day hold at about day 5.. <snip>
I don't think the 7-day hold applies to purchasing brokered products, but just to transferring the money out of the account. I know for sure it doesn't apply to me, as many times I've placed a buy order for an individual bond or CD, and that same day placed a buy order for my settlement fund in an amount to cover the bond/CD purchase, using my external bank as the source of the cash. The buy order for the settlement fund settles the next trading day (T+1), and the bond/CD order settles the day after that (T+2).

I have a margin account, but I don't know that that matters. I never get charged margin interest in these situations.
the WF 2 yr CDs seem to be selling fast though - they may not be any by the end of the week.
The quantity available at Vanguard now is 14,159, which is more than there were last time I checked.

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Tue Sep 25, 2018 12:45 pm

There is a secondary 2-year CD at Fidelity at a net yield of 2.95%, quantity 275 with minimum quantity 1. I bought a small quantity yesterday at 2.98%--would have bought more, but didn't have more cash in my Fidelity IRA.

Here is a buy order preview showing the details:

Code: Select all

Action 	Buy
CUSIP 	795450W50
Description 	SALLIE MAE BK SLT LAKE CITY UT CD 2.90000% 09/28/2020
Quantity 	1
Coupon 	2.900
Maturity Date 	09/28/2020
Trade Date 	09/25/2018
Settlement Date 	09/27/2018
Order Type 	Price Limit at 99.797
Limit Price 	99.797
Mark-up 	0.10
Price w/Mark-up 	99.897
Effective Yield 	2.953215
Accrued Interest 	0.08
There is nothing comparable available at Vanguard or Schwab. Note that this CD was available as a new-issue at at 2.90% at Schwab, but a few minutes ago they only had 53, and now they only have 2, so probably gone by the time I post this, but they have other new-issue CDs at 2.90%. I thought I saw some of this one as a new-issue at Fidelity too, but not now--Fidelity still has other new-issues at 2.90%.

As of now, Vanguard only has 229 169 of the Wells Fargo 2.90% new issue, and nothing from other banks. Of course WF might make more available to Vanguard (Fidelity has over 60,000 of these).

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Re: 2-year CDs at Vanguard and Fidelity Today

Post by livesoft » Tue Sep 25, 2018 1:11 pm

FOMC is meeting NOW, so I suspect yields will be volatile for a couple of days.
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Re: 2-year CDs at Vanguard and Fidelity Today

Post by Kevin M » Tue Sep 25, 2018 3:02 pm

livesoft wrote:
Tue Sep 25, 2018 1:11 pm
FOMC is meeting NOW, so I suspect yields will be volatile for a couple of days.
I wouldn't expect this to have much impact on 2-year CDs. Except for the one good deal at Fidelity, a fairly small offering, best 2-year CD yields have been stable at about 2.90% (new issue or secondary net of $1/CD commission).

Even 2-year Treasuries have been pretty stable at about 2.82% for last couple of days, although the yield on the recently auctioned 2-year Treasury has dropped a smidge since I first looked today, but only a few tenths of a basis point.

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