grkmec wrote: ↑
Tue Jan 15, 2019 2:49 pm
Kevin, do you mind sharing the details on the new CD you are going into?
I've been mum on this until now, as I wanted to be sure we got everything we could allocated to these CDs, and they'll probably pull the offer once they get a certain amount of deposits. The first rep I spoke to said that many people had been joining and depositing the maximum of $500K to this CD (which they and other CUs call a "certificate").
They are all open now, and will be funded tomorrow, and this deal has already been mentioned in a couple of other threads, so I'll break my silence. The credit union is Patelco, and here is a link to the CD deal: https://www.patelco.org/explore-service ... s#SCP00001
It pays 3% in year one, 3.5% in year two, and 4.0% in year three (all figures are APY). Additionally, you are able to do a penalty-free withdrawal when the rate changes, with a 10-day grace period.
Right off the bat, 3% is a good rate for a 1-year fixed-income security with essentially no credit risk. The TEY I've been seeing on Treasuries with maturities up to about one year is slightly less, at about 2.9% (that's with yield of about 2.6%), and 1-year new-issue brokered CD at Vanguard is only 2.55% (even 3-year new-issue brokered is only 2.95%).
You probably can find other 1-year CDs at about this yield, but I'm already a member of this credit union, and am not interested in joining more banks or credit unions unless the deal is spectacular. I don't know what the membership requirements are--I joined it some years ago, and it is local, so I probably joined based on geography.
The guaranteed, annual rate increases significantly reduce reinvestment risk over the next three years. Reinvestment risk is the most common criticism of keeping maturities very short due to very flat yield curves (I haven't been going beyond about nine months lately).
Finally, the penalty-free withdrawal options after one year and two years significantly reduce term risk.
To summarize, they have put all the advantages in the buyer's favor, which is the opposite of what we usually see with brokered CDs. For example, a higher rate on a brokered CD usually comes with a call option, increasing reinvestment risk for the buyer, while this CD comes with a put option, reducing term risk for the buyer.
My wife and I sold a bunch of our Treasuries, some purchased as recently as a week or so ago, to load up on this CD. I'm planning on doing a post about what I learned in doing that. We also sold most of our Treasury money market, and I sold most of my short-term Treasury index fund. We still have plenty of fixed income maturing over the next year, so if something even better comes along, we'll be ready for it.