Brokered CD's in Rising Interest Rate

[npage]

So as not to clutter the bond fund thread would like people's insights into Brokered CD's with 2 to 5 year Brokered CD's nearing 3% or slightly more in some cases. I understand the interest is only tax deductible at state level.

Some are callable at 100% principal return and interest earned to date at some set time before full maturity. This is clearly marked at Vangaurd site.

I understand they are subject to some market variation if sold before or not held to term.

Anything else to be aware of? Seem like a reasonable component to the cash/bond portion of the portfolio at these rates? Or maybe all of it. Maybe start building a ladder over next couple years. I always assumed in my model that my cash/bond allocation returned around 3% ish so this seems like a pretty safe option for that.

Portfolio is right now 70 % VTI (dropping daily) and 30 % cash (Was a muni fund). Could live off 4% right now but partner still working for next 3 to 5 years.

[GenXguy]

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Originally Posted by npage So as not to clutter the bond fund thread would like people's insights into Brokered CD's with 2 to 5 year Brokered CD's nearing 3% or slightly more in some cases. I understand the interest is only tax deductible at state level. I understand the interest is only tax deductible at state level.

Are you sure about that in your state? In my state, I typically have to pay state income taxes on brokered CDs. It's the treasuries that I don't have to pay state income tax on the income.

[Jerry1]

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Originally Posted by npage I always assumed in my model that my cash/bond allocation returned around 3% ish so this seems like a pretty safe option for that.

Did you also assume the level of inflation we are experiencing right now? Personally, if I was going to buy CD’s or bonds right now, I’d keep the duration very short - two years or less.

[npage]

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Originally Posted by GenXguy Are you sure about that in your state? In my state, I typically have to pay state income taxes on brokered CDs. It's the treasuries that I don't have to pay state income tax on the income.

Ooops, corrected, you are right, was confusing with treasuries in my head. Inflation is not factored into this discussion at moment, at least as it pertains to any nuances of CD's. My withdrawal rate or lack of at moment (living off partner wages 3 to 5 years) is flexible and fine.

Agreed was thinking nothing longer than 2 years.

[plsprius]

Were it me, instead of a brokered CD, and if I was looking for a 2-3 yr investment, I'd purchase a 3 year treasury that is currently yielding 2.865% (free of state tax). You can buy them directly on the Vanguard site. If you buy them at the periodic auctions you can avoid the bid/ask spread difference that will slightly reduce the yield.

Actually, I'd wait another 10 days to see what the Fed does in early May...and if the amount I was looking to invest was small ($10K or less) I'd buy an I-Bond if I hadn't already done so this year.

[npage]

I-bonds full. Assuming state tax neutrality why a treasury over CD, rates are practically identical at 3 years? Educate please.

Agreed on timing, I was thinking several tranches of them over next 6 to 12 months. They may hit 4 to 5% if we are lucky.

[jebmke]

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Originally Posted by npage I-bonds full. Assuming state tax neutrality why a treasury over CD, rates are practically identical at 3 years? Educate please. Agreed on timing, I was thinking several tranches of them over next 6 to 12 months. They may hit 4 to 5% if we are lucky.

Treasuries are highly liquid. CDs would take a hit if you had to sell them.

[npage]

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Originally Posted by jebmke Treasuries are highly liquid. CDs would take a hit if you had to sell them.

Got it, assuming no sale.

[jazz4cash]

The brokered CD’s are looking better esp if I buy at Fido since I already have an account there. I prefer MYGA (5 yrs @ 3.6) BUT they are lousy if there’s any chance of early redemption. For me I’d rank Treasuries and MYGA’s ahead of brokered CD’s

[npage]

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Originally Posted by jazz4cash The brokered CD’s are looking better esp if I buy at Fido since I already have an account there. I prefer MYGA (5 yrs @ 3.6) BUT they are lousy if there’s any chance of early redemption. For me I’d rank Treasuries and MYGA’s ahead of brokered CD’s

Assuming rates equal for theoretical, would you still rate higher and why?

[jazz4cash]

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Originally Posted by npage Assuming rates equal for theoretical, would you still rate higher and why?

For equal rates, rank order is Treasuries, CD’s (brokered or not), then MYGA. Buying MYGA’s is a process and surrender fees are massive. The ones at Fido are blue chip issuers only and the rates tend to be on the low side but maybe they are catching up.

[foxfirev5]

I know I'm in the minority here but I don't agree with the go short term plan. I prefer to diversify my duration. My current avg maturity now sits at 3.9 years spread over 14 years of CD's and Treasuries. I will admit this is still a much lower duration and maturity than a TBM fund. But that's what matches my plan. Since I have a specific need for funds in the future I prefer to match my holdings to my needs rather than speculate about rates. If you go short term it's an endless game. What if overall rates drop again in 2 years?

As far as CD's vs Treasuries either can work. My past experience is that Treasuries are easier to trade if you're not holding to maturity. Personally I'm going with Treasury Strips which match my future withdrawals. However, since they are being bought from a CD ladder I've had in place for years, it will be gradual. Also I hold a big chunk of Series I bonds I've accumulated over the years. My only advice is to look at the big picture and diversify over the long term. Otherwise it will drive you nuts. FWIW I spend a heck of a lot more time on this site than required to maintain my bond portfolio.

[VFK57]

Until last year I was for the CDs ladder - the safest investment and for 5 years CD rates were well over 2%. However, current inflation vs CD rate is at high loss. 2-3% vs inflation 8.5%. What do you think will happen when the Feds will aggressively raise the interest rate? The Market already started adjustment yesterday. Than the question is what is more important for the Feds: fight the inflation or economy what might turn South to the recession?

[npage]

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Originally Posted by VFK57 Until last year I was for the CDs ladder - the safest investment and for 5 years CD rates were well over 2%. However, current inflation vs CD rate is at high loss. 2-3% vs inflation 8.5%. What do you think will happen when the Feds will aggressively raise the interest rate? The Market already started adjustment yesterday. Than the question is what is more important for the Feds: fight the inflation or economy what might turn South to the recession?

Right, but I don't see a better option for some traditional stock / bond (Cash, Cd, treasury) portfolio.

I run a 70/30 VTI/Bond fund mix typically, with the 30 currently sitting in cash. Not comfortable raising equity chunk and basically just trying to optimize the 30%. Your point is not missed, inflation sucks no matter which choice we make.

My modeling always assumed roughly a 3% return on the non equity portion or the portfolio. I can survive if less or more, so right now CD's seem to offer a better proposition. That said when they are finally done raising rates, who knows.

I'm lucky I have 3 to 5 years of partner working still, so part of me says wait for a bit more stock market dump and raise the equity allocation too. Who knows, it's all timing and not ideal.

[Dtail]

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Originally Posted by jazz4cash For equal rates, rank order is Treasuries, CD’s (brokered or not), then MYGA. Buying MYGA’s is a process and surrender fees are massive. The ones at Fido are blue chip issuers only and the rates tend to be on the low side but maybe they are catching up.

Since Fidelity mainly only gets involved with A++ companies for MYGA, their rates will not logically match Americo @3.60% for 5 years, as they are A rated.
So it depends how low is willing to go on the ratings.

[jazz4cash]

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Originally Posted by Dtail Since Fidelity mainly only gets involved with A++ companies for MYGA, their rates will not logically match Americo @3.60% for 5 years, as they are A rated. So it depends how low is willing to go on the ratings.

Agree 100%. I’m guessing the process at Fido ‘might’ also be a bit smoother than Blueprint Income /Americo. Moving IRA funds around I have experienced issues about 30% of the time. As for risk I am very comfortable with a B+ rating. My ladder rungs are moderate so that offsets the risk.

[VFK57]

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Originally Posted by npage Right, but I don't see a better option for some traditional stock / bond (Cash, Cd, treasury) portfolio. I run a 70/30 VTI/Bond fund mix typically, with the 30 currently sitting in cash. Not comfortable raising equity chunk and basically just trying to optimize the 30%. Your point is not missed, inflation sucks no matter which choice we make. My modeling always assumed roughly a 3% return on the non equity portion or the portfolio. I can survive if less or more, so right now CD's seem to offer a better proposition. That said when they are finally done raising rates, who knows. I'm lucky I have 3 to 5 years of partner working still, so part of me says wait for a bit more stock market dump and raise the equity allocation too. Who knows, it's all timing and not ideal.

I found Acre Trader and Farming Together websites for the Farm Land investment and started to transfer money, after maturity of CDs toward the Farm Land. Cons: you have to lock money from 5 to 12 years, depend on a farm you select to invest to, it might go with lower than expected annual cash return (rents and crop percentage). Pro: at least 8% annual return as it adding in a Farm Land cost raises (average 4.9% annually). Corn, beans, veggies farms are with lower risks, while citruses, fruits and nuts are with higher annual returns 9 to 13% but have higher risks. Looking at my stocks, it seems that it is much lower risk since food is #1 commodity for people. The UN predicts, it is going to be big grain shortages because of climate change, Russia - Ukraine war and exploding population in many countries. Currently many Mid Eastern and African countries are really worry where to buy grain as they face big shortages on what is needed.

[jazz4cash]

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Originally Posted by VFK57 I found Acre Trader and Farming Together websites for the Farm Land investment and started to transfer money, after maturity of CDs toward the Farm Land. Cons: you have to lock money from 5 to 12 years, depend on a farm you select to invest to, it might go with lower than expected annual cash return (rents and crop percentage). Pro: at least 8% annual return as it adding in a Farm Land cost raises (average 4.9% annually). Corn, beans, veggies farms are with lower risks, while citruses, fruits and nuts are with higher annual returns 9 to 13% but have higher risks. Looking at my stocks, it seems that it is much lower risk since food is #1 commodity for people. The UN predicts, it is going to be big grain shortages because of climate change, Russia - Ukraine war and exploding population in many countries. Currently many Mid Eastern and African countries are really worry where to buy grain as they face big shortages on what is needed.

Seems more like a play on commodities and real estate…..not much like a brokered CD.

[VFK57]

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Originally Posted by jazz4cash Seems more like a play on commodities and real estate…..not much like a brokered CD.

Sure, yet many people, including on this website, are worrying on how to survive in a high inflation environment. I think that this inflation is not going to be short lived. If the Feds will raise the rate to 8.5%, they will go bankrupt due to high Debt ($30.4 trillions) and constant huge budget deficit.

[Magus]

1 year treasury bills yields are 2.05% right now and 2 year is around 2.7%. Personally I'd go that route with much more liquidity.

Quote:

My current avg maturity now sits at 3.9 years spread over 14 years of CD's and Treasuries. I will admit this is still a much lower duration and maturity than a TBM fund. But that's what matches my plan. Since I have a specific need for funds in the future I prefer to match my holdings to my needs rather than speculate about rates. If you go short term it's an endless game. What if overall rates drop again in 2 years?

I think the two big questions are 1) How long is high inflation going to last. I've been saying longer than anyone thinks for over a year and still feel that way. 2) Have we finally broken the 40 year downward bond yield trend and starting an upward trend.

If you agree with my #1, you want shorter duration. If you think #2 is possible you definitely want shorter duration. Long bonds work wonderfully well in a downward interest rate environment, not so much in rising environment. And yes you can sit on them and not take a hit on them but if you need to redeem them before maturity you will take a far bigger blood bath than shorter duration bonds. A small nibble in long bonds is fine. Plus, if rates go back down it means inflation has dropped back to 2% or so - which would be a good thing so slightly lower rates than today with significantly lower inflation is still a higher real yield than buying now and locking in -5-8% depending on whether or not you adjust OER.