TIL about "brokered CDs" - Chasing 1 year yield

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AerialWombat
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TIL about "brokered CDs" - Chasing 1 year yield

Post by AerialWombat » Wed Aug 08, 2018 7:14 pm

Today I learned (TIL) about brokered CDs. I'm looking at the Vanguard options for this. One year at 2.35%, 18 month at 2.55%, 2 year at 2.80%. These start to smell attractive for what I do.

These yields are all better than what my two credit unions and three banks offer.

I'm an active real estate investor that buys approximately one house per year. I'm about to close on property #5 in six weeks or so. Last week, I moved down payment and closing cost money (about $40k) from Vanguard Intermediate Tax Exempt (VWITX), Vanguard Long Term Tax Exempt (VWLTX), and Vanguard Total Market (VTSAX) into Vanguard Prime Money Market (VMMXX) in my taxable account. In 4 weeks, I'll transfer these funds to regular checking account to prepare for closing. I'm in the 35% tax bracket this year (for the first time ever), and simply accept the short term capital gains bill associated with the transaction -- I more than make it back on the depreciation side of the rental property.

Here are current SEC yields for non-equity funds I'm using now:

VWITX: 2.32%
VWLTX: 2.75%
VMMXX: 2.05%

I'm willing to accept the mild market fluctuations of a bond fund, as well as the capital gains tax bill associated with selling them on short term. Because these funds are designated for another investment class (direct real estate), rather than a personal residence, I'm willing to chase yield a little bit.

What I'm not comfortable with is the roller coaster ride of equities. Holding VTSAX in taxable is making me nauseous, and I'm gradually spending that down for real estate purchases. I'm maxing my Solo 401k contributions, and I'm primarily invested in Wellesley (VWINX), Total Bond (BND), and Vanguard Total World (VT) in the 401k. I'm trying to maintain roughly 30/70 stocks/bonds in securities, including these short-term funds in taxable that get pivoted toward real estate.

I realize that my real estate investing probably sounds wacky to a lot of BH types, but it's a world I know and am comfortable in.

With this fact pattern, here is my question: Given my typical 12-24 month time horizon until a closing, is there another non-equity option for chasing slightly higher yield?

With the brokered CD options I learned about today, it looks like I can lock down some better yield by doing a CD ladder out until the next two or three anticipated closings. But if there are some slight volatility fixed income classes that might give me something closer to 3% to 3.5%, I'm all ears.

Thank you!

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Kevin M
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Re: TIL about "brokered CDs" - Chasing 1 year yield

Post by Kevin M » Wed Aug 08, 2018 8:20 pm

What is your state marginal tax rate? If you pay state income tax, Treasuries could be better than CDs in taxable accounts. Even if no state income tax, a 1-year Treasury has about the same yield as a 1-year brokered CD, so given better liquidity of Treasuries, a 1-year Treasury would be preferable.

Also, what matters are your marginal tax rates, not your tax brackets? For example, your federal tax bracket might be 35%, but if you are paying the net investment income tax, that adds on 3.8% to the federal marginal rate on investment income.

At my marginal tax rates of 27% fed and 8% state, Treasuries have higher taxable-equivalent yields (TEYs) out to 3-year maturity, so I would go with a 2-year Treasury, with a TEY of about 3%, over a 2-year CD at about 2.80% in taxable.

Kevin
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AerialWombat
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Re: TIL about "brokered CDs" - Chasing 1 year yield

Post by AerialWombat » Wed Aug 08, 2018 8:31 pm

Kevin M wrote:
Wed Aug 08, 2018 8:20 pm
What is your state marginal tax rate?
Thanks for your reply.

No state income tax.

1 year Treasury looks about 2.4%. 2-year Treasury looks like 2.67%. 3 year 2.755%.

I guess this was my attraction to the Vanguard Intermediate/Long municipal bond funds, since I don't have the state tax issue to contend with.

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Kevin M
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Re: TIL about "brokered CDs" - Chasing 1 year yield

Post by Kevin M » Thu Aug 09, 2018 11:38 am

AerialWombat wrote:
Wed Aug 08, 2018 8:31 pm
Kevin M wrote:
Wed Aug 08, 2018 8:20 pm
What is your state marginal tax rate?
Thanks for your reply.

No state income tax.

1 year Treasury looks about 2.4%. 2-year Treasury looks like 2.67%. 3 year 2.755%.

I guess this was my attraction to the Vanguard Intermediate/Long municipal bond funds, since I don't have the state tax issue to contend with.
Then between just CDs and Treasuries, I'd go with Treasury at 1-year and CDs beyond that.

If you'd consider individual AA munis, I see a 2-year AA at Fidelity at 1.90%, which is 2.92% TEY at 35% marginal federal tax rate, and 3-year AA at 2.11% which is 3.25% TEY. However, evaluating individual munis is much more work than CDs or Treasuries. There some discussion of my experiences buying individual munis here: 2-year AA Munis at Vanguard and Fidelity Today.

One benefit of individual munis over funds for your situation is that you can target maturity to when you'll need the money, matching the maturity of the asset to that of the liability.

Kevin
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AerialWombat
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Re: TIL about "brokered CDs" - Chasing 1 year yield

Post by AerialWombat » Fri Aug 10, 2018 12:09 pm

Kevin M wrote:
Thu Aug 09, 2018 11:38 am
Then between just CDs and Treasuries, I'd go with Treasury at 1-year and CDs beyond that.

If you'd consider individual AA munis, I see a 2-year AA at Fidelity at 1.90%, which is 2.92% TEY at 35% marginal federal tax rate, and 3-year AA at 2.11% which is 3.25% TEY. However, evaluating individual munis is much more work than CDs or Treasuries. There some discussion of my experiences buying individual munis here: 2-year AA Munis at Vanguard and Fidelity Today.

One benefit of individual munis over funds for your situation is that you can target maturity to when you'll need the money, matching the maturity of the asset to that of the liability.

Kevin
I never considered individual munis, actually. Thanks for the suggestion. I'll look into those options and read through the other thread you created. Thanks!

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