Cash in CD for better yield?

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zaplunken
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Cash in CD for better yield?

Post by zaplunken »

I think it makes sense to prematurely cash in a CD I have at Ally but I wonder if I am missing something.

The CD matures Nov. 19 and is paying 0.95% in a taxable account. The current value with the 60 penalty is $5,022. It is earning 13 cents per day in interest and as of yesterday 4/6 there are 227 days to 11/19. So at 13 cents per day that is $29.51 in forfeited interest in addition to the penalty which is $7.80.

In this day and age, 0.95% is actually a pretty nice rate but I want to move the money to my taxable Vanguard account into the Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX). While I can calculate the cost of keeping or prematurely cashing in the CD, the return over the next 227 days in the Intermediate-Term Tax-Exempt Fund is much harder! The 30 day SEC yield is 0.93% so right there the interest is basically the same as the CD's but it is tax free. The dividend on 3/31 was 2.13%. If it is earning 2.13% tax free that is a no brainer even with the nav potentially changing day by day though it doesn't change a lot if at all.

Typically I'd never prematurely cash in a CD but this seems like moving the money into the Intermediate-Term Tax-Exempt Fund is a much better option and I will move the money there in November if I keep the CD to maturity.

Thoughts?
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goodenyou
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Re: Cash in CD for better yield?

Post by goodenyou »

If I am reading this right, you are going to improve yield by about 1.2% by moving your money. If there is approximately $5,000 in the investment, it will amount to about $60 per year or $5 per month at a 0% tax rate. Also, the NAV of your bond fund can go down erasing all the extra yield for a period of time. How much money is in the CD?
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zaplunken
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Re: Cash in CD for better yield?

Post by zaplunken »

The current value with the 60 day penalty is $5,022.

I have had 5 CDs mature over the past 9 weeks and all those monies went to the Intermediate-Term Tax-Exempt Fund. This is not a lot of money, it is that I think the money can be in a better place vs staying where it is for 7 1/2 months.
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anon_investor
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Re: Cash in CD for better yield?

Post by anon_investor »

I would not, especially with rising interest rates as the bond fund will suffer a loss of principal.

I would sell to buy I Bonds though.
Doctor Rhythm
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Re: Cash in CD for better yield?

Post by Doctor Rhythm »

Apples & oranges: bonds aren’t CDs and can’t be compared just by looking at interest rates. The NAV for VWIUX fell by 1.5% in the last 2 months and is down 1% YTD.

ETA: if it’s only $5000, and that’s not a lot for you, then do whatever you want. At the most, you might gain or lose enough money to buy a tank of gas by November.
MrJedi
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Re: Cash in CD for better yield?

Post by MrJedi »

Using the latest dividend payments is not a good way to compare. The dividend payments are still partially made up of older bonds that are paying higher, this is captured in the NAV of the fund, so you are paying for it. If we assume interest remains constant, your dividends will continue to shrink as the higher paying bonds get replaced by the current lower interest bonds. Your share price will go down as well as the higher interest bonds get replaced.

Your 0.95% CD seems like the better deal to me, since the duration is much shorter but yield is similar.
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zaplunken
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Re: Cash in CD for better yield?

Post by zaplunken »

MrJedi wrote: Wed Apr 07, 2021 6:40 pm Using the latest dividend payments is not a good way to compare. The dividend payments are still partially made up of older bonds that are paying higher, this is captured in the NAV of the fund, so you are paying for it. If we assume interest remains constant, your dividends will continue to shrink as the higher paying bonds get replaced by the current lower interest bonds. Your share price will go down as well as the higher interest bonds get replaced.

Your 0.95% CD seems like the better deal to me, since the duration is much shorter but yield is similar.
Interesting but since we don't know what interest rates will do and the NAV has been fairly stable lately the tax exempt fund might be better for the short term. Is that 2 months or 6 months? I don't know but it can always be moved. Ally's online savings is 50 bp, 12 month High Yield CD is 55 bp and the No Penalty CD is 50 bp and they are taxable. While 2 are liquid, the 12 month is too long to tie up money at 55 bp. I have a fair amount of cash and like not paying taxes on the interest.
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Re: Cash in CD for better yield?

Post by MrJedi »

zaplunken wrote: Wed Apr 07, 2021 6:53 pm
MrJedi wrote: Wed Apr 07, 2021 6:40 pm Using the latest dividend payments is not a good way to compare. The dividend payments are still partially made up of older bonds that are paying higher, this is captured in the NAV of the fund, so you are paying for it. If we assume interest remains constant, your dividends will continue to shrink as the higher paying bonds get replaced by the current lower interest bonds. Your share price will go down as well as the higher interest bonds get replaced.

Your 0.95% CD seems like the better deal to me, since the duration is much shorter but yield is similar.
Interesting but since we don't know what interest rates will do and the NAV has been fairly stable lately the tax exempt fund might be better for the short term. Is that 2 months or 6 months? I don't know but it can always be moved. Ally's online savings is 50 bp, 12 month High Yield CD is 55 bp and the No Penalty CD is 50 bp and they are taxable. While 2 are liquid, the 12 month is too long to tie up money at 55 bp. I have a fair amount of cash and like not paying taxes on the interest.
NAV on your proposed fund has dropped 87 bps this YTD. If you aren't prepared to hold for duration (4.5 years for this fund), just be aware of the interest rate risk. The remaining term of your current CD and your proposed newly issued CDs are significantly shorter in duration, it's not quite right comparing to a bond fund with 4.5 year duration.
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zaplunken
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Re: Cash in CD for better yield?

Post by zaplunken »

NAV on your proposed fund has dropped 87 bps this YTD.
I don't understand what you are saying. Basis points would measure yield not nav and the change in bp is 3 bp from 1/4 to 4/7 and the nav dropped 12 cents.

1/4/2021 - 01/04/2021 $14.87 0.89%
4/7/2021 - 04/07/2021 $14.75 0.92%

On 1/4/2021 nav was $14.87 and today's was $14.75, this isn't a wild range considering the 10 yr T note was 93 bp on 1/4 and 1.67% today, that is a huge difference. 72% of the bonds in the fund range from 5-10 years (27% of the fund) and 10-20 years (45% of the fund), those may not be rolling off any time soon.

I realize the nav is fluctuating week by week and month by month, but it is not like a long term bond fund with a duration of say 17 or 18 years.
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anon_investor
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Re: Cash in CD for better yield?

Post by anon_investor »

zaplunken wrote: Wed Apr 07, 2021 7:32 pm
NAV on your proposed fund has dropped 87 bps this YTD.
I don't understand what you are saying. Basis points would measure yield not nav and the change in bp is 3 bp from 1/4 to 4/7 and the nav dropped 12 cents.

1/4/2021 - 01/04/2021 $14.87 0.89%
4/7/2021 - 04/07/2021 $14.75 0.92%

On 1/4/2021 nav was $14.87 and today's was $14.75, this isn't a wild range considering the 10 yr T note was 93 bp on 1/4 and 1.67% today, that is a huge difference. 72% of the bonds in the fund range from 5-10 years (27% of the fund) and 10-20 years (45% of the fund), those may not be rolling off any time soon.

I realize the nav is fluctuating week by week and month by month, but it is not like a long term bond fund with a duration of say 17 or 18 years.
The drop in NAV would have wiped out any yield advantage over the CD...
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Re: Cash in CD for better yield?

Post by z3r0c00l »

zaplunken wrote: Wed Apr 07, 2021 7:32 pm
NAV on your proposed fund has dropped 87 bps this YTD.
I don't understand what you are saying. Basis points would measure yield not nav and the change in bp is 3 bp from 1/4 to 4/7 and the nav dropped 12 cents.
bps might be more commonly used to describe yield but it is merely an abbreviation of permyriad, so it can describe any change the way percentage can refer to an interest rate or change in nav. The point is valid, a move in interest rates upward could easily put you behind the CD over the next 9 months. You are making a bet on interest rates that could go wrong, or it could pay off.

I kinda made such a bet when my CD ended in March and I moved the money into a bond fund. Happened to coincide with interest rate drops most recently and I made a month's worth of CD interest in just two days as a result. Could all evaporate tomorrow if rates go up again. Personally I like a promised .95% in today's environment at least until November, then you can see where interest rates are on bond funds.
NabSh
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Re: Cash in CD for better yield?

Post by NabSh »

The drop in value or price is only realized when asset is sold.
Having said that personally I would not break the CD. I would leave it as is. When the CD matures in November, I see the interest rates and make a decision.
anon_investor wrote: Wed Apr 07, 2021 7:34 pm
zaplunken wrote: Wed Apr 07, 2021 7:32 pm
NAV on your proposed fund has dropped 87 bps this YTD.
I don't understand what you are saying. Basis points would measure yield not nav and the change in bp is 3 bp from 1/4 to 4/7 and the nav dropped 12 cents.

1/4/2021 - 01/04/2021 $14.87 0.89%
4/7/2021 - 04/07/2021 $14.75 0.92%

On 1/4/2021 nav was $14.87 and today's was $14.75, this isn't a wild range considering the 10 yr T note was 93 bp on 1/4 and 1.67% today, that is a huge difference. 72% of the bonds in the fund range from 5-10 years (27% of the fund) and 10-20 years (45% of the fund), those may not be rolling off any time soon.

I realize the nav is fluctuating week by week and month by month, but it is not like a long term bond fund with a duration of say 17 or 18 years.
The drop in NAV would have wiped out any yield advantage over the CD...
MrJedi
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Re: Cash in CD for better yield?

Post by MrJedi »

zaplunken wrote: Wed Apr 07, 2021 7:32 pm
NAV on your proposed fund has dropped 87 bps this YTD.
I don't understand what you are saying. Basis points would measure yield not nav and the change in bp is 3 bp from 1/4 to 4/7 and the nav dropped 12 cents.

1/4/2021 - 01/04/2021 $14.87 0.89%
4/7/2021 - 04/07/2021 $14.75 0.92%

On 1/4/2021 nav was $14.87 and today's was $14.75, this isn't a wild range considering the 10 yr T note was 93 bp on 1/4 and 1.67% today, that is a huge difference. 72% of the bonds in the fund range from 5-10 years (27% of the fund) and 10-20 years (45% of the fund), those may not be rolling off any time soon.

I realize the nav is fluctuating week by week and month by month, but it is not like a long term bond fund with a duration of say 17 or 18 years.
I used bp to match the same units you were using. The point is if you cash out of the bond fund with that drop in NAV, you will lose principle and totally negate any positive yield difference. To minimize this potential loss/risk, you need to hold the bond fund longer, which is somewhat contrary to your argument that CDs need to be "locked up". This bond fund has a longer duration and thus effectively has a longer "lock up" period to minimize interest rate risk.
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Re: Cash in CD for better yield?

Post by Doctor Rhythm »

zaplunken wrote: Wed Apr 07, 2021 7:32 pm
NAV on your proposed fund has dropped 87 bps this YTD.
I don't understand what you are saying. Basis points would measure yield not nav and the change in bp is 3 bp from 1/4 to 4/7 and the nav dropped 12 cents.

1/4/2021 - 01/04/2021 $14.87 0.89%
4/7/2021 - 04/07/2021 $14.75 0.92%

On 1/4/2021 nav was $14.87 and today's was $14.75, this isn't a wild range considering the 10 yr T note was 93 bp on 1/4 and 1.67% today, that is a huge difference. 72% of the bonds in the fund range from 5-10 years (27% of the fund) and 10-20 years (45% of the fund), those may not be rolling off any time soon.

I realize the nav is fluctuating week by week and month by month, but it is not like a long term bond fund with a duration of say 17 or 18 years.
I’m confused about how you’re doing the math on this. I have an IRA that’s entirely invested in a total bond fund. I make no contributions or withdrawals and all income is automatically reinvested. The balance in that account is down over 3% YTD despite a yield that’s higher than what you’re getting on the muni fund. In the long term, the present drop in NAV won’t matter. However, your question is about a short term (6 month) scenario between now and the time your CD matures. In your situation, changes in NAV are very likely to be more important than the difference in tax-equivalent yields on a muni fund and a CD that both pay < 1%.
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zaplunken
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Re: Cash in CD for better yield?

Post by zaplunken »

Thanks for your replies. No one thinks this is a good idea, this is why I asked for some alternate views on this.
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Re: Cash in CD for better yield?

Post by UpperNwGuy »

zaplunken wrote: Wed Apr 07, 2021 6:15 pm The current value with the 60 day penalty is $5,022.

I have had 5 CDs mature over the past 9 weeks and all those monies went to the Intermediate-Term Tax-Exempt Fund. This is not a lot of money, it is that I think the money can be in a better place vs staying where it is for 7 1/2 months.
You have a plan (let CDs mature, then put the money into the muni fund). Why are you trying to accelerate your plan by selling a CD before it matures? Are you letting impatience guide your decisions?
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Re: Cash in CD for better yield?

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UpperNwGuy wrote: Thu Apr 08, 2021 8:21 am
zaplunken wrote: Wed Apr 07, 2021 6:15 pm The current value with the 60 day penalty is $5,022.

I have had 5 CDs mature over the past 9 weeks and all those monies went to the Intermediate-Term Tax-Exempt Fund. This is not a lot of money, it is that I think the money can be in a better place vs staying where it is for 7 1/2 months.
You have a plan (let CDs mature, then put the money into the muni fund). Why are you trying to accelerate your plan by selling a CD before it matures? Are you letting impatience guide your decisions?
Actually, there are 2 reasons and I did not mention them as I didn't want them to cloud the answers.

First, I am pretty disgusted with Ally. Back in October I transferred $600 from my local bank to Ally, however, I forgot to deduct my insurance payment that is on autopay, first time I ever made a mistake like that. I had ISF and the money had to go back. OK, I screwed up. My bank hit me with a fee but Ally didn't but Ally took away my over night transfer from an outside source and I was told I had to wait 90 days to get it back. When the 90 days was up, I was still on a 3 day wait. I called twice and the 2nd time got the right explanation. It was not for 90 days, it was for an entire year! I've had the Ally account for 15 years and never had any issues with well over $100k there. Maybe that doesn't bother you but I was determined to empty the all Ally funds short of a couple of thousand dollars as overnight to my local bank from Ally was still in effect.

The second thing was the CD not maturing until mid November. The other 6 or 7 CDs were all maturing between late February and early April and they were earning excellent interest so no way was I closing them, But this last one being only $5k and such a low rate and having to wait 7 months, I thought it would be better off just getting it out of Ally and into the Intermediate-Term Tax-Exempt Fund where all the other CD money went.
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Re: Cash in CD for better yield?

Post by anon_investor »

zaplunken wrote: Thu Apr 08, 2021 6:44 pm
UpperNwGuy wrote: Thu Apr 08, 2021 8:21 am
zaplunken wrote: Wed Apr 07, 2021 6:15 pm The current value with the 60 day penalty is $5,022.

I have had 5 CDs mature over the past 9 weeks and all those monies went to the Intermediate-Term Tax-Exempt Fund. This is not a lot of money, it is that I think the money can be in a better place vs staying where it is for 7 1/2 months.
You have a plan (let CDs mature, then put the money into the muni fund). Why are you trying to accelerate your plan by selling a CD before it matures? Are you letting impatience guide your decisions?
Actually, there are 2 reasons and I did not mention them as I didn't want them to cloud the answers.

First, I am pretty disgusted with Ally. Back in October I transferred $600 from my local bank to Ally, however, I forgot to deduct my insurance payment that is on autopay, first time I ever made a mistake like that. I had ISF and the money had to go back. OK, I screwed up. My bank hit me with a fee but Ally didn't but Ally took away my over night transfer from an outside source and I was told I had to wait 90 days to get it back. When the 90 days was up, I was still on a 3 day wait. I called twice and the 2nd time got the right explanation. It was not for 90 days, it was for an entire year! I've had the Ally account for 15 years and never had any issues with well over $100k there. Maybe that doesn't bother you but I was determined to empty the all Ally funds short of a couple of thousand dollars as overnight to my local bank from Ally was still in effect.

The second thing was the CD not maturing until mid November. The other 6 or 7 CDs were all maturing between late February and early April and they were earning excellent interest so no way was I closing them, But this last one being only $5k and such a low rate and having to wait 7 months, I thought it would be better off just getting it out of Ally and into the Intermediate-Term Tax-Exempt Fund where all the other CD money went.
Sounds like you have never had a Citi account... they lose your money... hell, they lose their own money...

So you don't like Ally anymore, no reason to give up good FDIC insured interest just out of spite. Emotion and personal finance usually don't mix well.

What bank are you using now?
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zaplunken
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Re: Cash in CD for better yield?

Post by zaplunken »

As the CDs have matured I moved the money to the Intermediate-Term Tax-Exempt Fund. I don't keep much at my local bank as the interest rate is 5 bp. Ally has a few thousand in addition to the CD.
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