As Ricky Ricardo would say, "Splain it too me, Loocy?" (CD rates)

[Andre1969]

Hey everyone,

I was just looking at CD rates at Citibank, and noticed something that struck me as weird...they're offering a 1 year CD for 4.00%, but a 2 year for only 2.00%?

could someone tell me what the catch is? The 1 year rate seems a bit too good to be true, but why would it be better than the 2 year rate? Here's where I'm seeing this...
https://online.citi.com/US/ag/banking/cd-account
Thanks!

 

[bobandsherry]

Hey everyone,



I was just looking at CD rates at Citibank, and noticed something that struck me as weird...they're offering a 1 year CD for 4.00%, but a 2 year for only 2.00%?



could someone tell me what the catch is? The 1 year rate seems a bit too good to be true, but why would it be better than the 2 year rate? Here's where I'm seeing this...

https://online.citi.com/US/ag/banking/cd-account

Thanks!

They must have a need for short term funds but not funds for 2+ years. They may also be forecasting rates dropping over the next 2 years and don't want to be paying a premium.

 

[audreyh1]

The bank isn’t on the hook for a higher rate at a longer duration. They simply don’t want to commit past one year at this point.

 

[kgtest]

I'm not a CD Whiz, and have never owned one...but my understanding is the bank is gaurenteeing a rate over a period of time. So for the one year period of time you are gaurenteed 4% and then its done. That gaurentee is over at one year mark.

Vs the 2 yr term, they don't want to float a higher rate because they are less confident in interest rate markets longer term.... and therefore locking in a stable, consistent 2% APY over a longer duration is a safer "bet" for the bank. They don't want to offer 4% for the longer 24 month duration.

I do see they have an 18month 4% which would be a better deal for you as a consumer. You are capturing that guarantied 4% for a longer duration.

 

[kgtest]

TO add to it in a little deeper dive...

The banker is making a bet that they can take your money for 12 months and are confident that the bets/investments they make over the duration of holding that money that they can earn a better ROI than the 4% they are offering you. The longer they make that bet/investment they become less confident (higher risk for them) that they can beat the 4% they are offering you, and since they don't want to lose the bet/underperform your guaranteed return, they are cheapening the deal...down to 2% for 2 years. You are essentially "floating" the bank capital, and in return they are investing it with the hopes they will outperform the rate they guaranteed you for that float.

Similar logic when it comes to a company that offers dividends. They are trying to attract capital (Investors) willing to put money into their company by offering a dividend that they are betting they can return while making a better ROI then what that dividend pays. Afterall, it takes money to make money...and the company you are investing in uses that as a strategy to attract the dividend investors, knowing with an amount of certainty that they can do better/earn more than what they promised you. When the "getting is good" they might increase the dividend... but when it's a tighter capital market, or the company is facing tougher times with higher operating costs, or less options to invest, they might choose to reduce or eliminate that dividend knowing that they will "lose the bet".

 

[COcheesehead]

Fidelity is showing 4.65% for 1 year and nothing beyond that. I would wait until Monday to see what is up. The fixed income market was a blow out yesterday. Banks and bonds closed today.

 

[kgtest]

When it comes to investing (for a person's lifetime) time is our enemy. Investment institutions and banks are in it for a much longer duration than the personal investor.

IF Citi had invested a large stake into the Nasdaq 2 days ago...realized the 8% gain, and then went ahead and sold half that off as a longer duration "product" aka 12 month CD today then they are buying themselves time. It took them a day to earn a 4% return ~2 days to earn ~8%, and they are reselling that timeframe in a 365 day product. If you look at investing products' value as a duration or timeline, they are clearly the winners. If we see another 8% rise in equities, maybe they extend that rate out to 3 or 4 years.

I just shared a chart in the chart of the day that was emphasizing how on down days, BIG UP days are soon to follow. The banks and investment firms know this and they probably made a nice bet and won a handsome reward in the tune of ~8% return over a 16hr investing timeframe..(which uncoincidentally followed mid-term elections) .and now they are repackaging their winnings into a CD and locking in their winnings over the next year. Just a mechanism of how banks make money really. It's all about the float duration. The more money they can float the longer they can float it, the less risk they endure as markets have always over time gone up, not down.

If RunningMan is reading this, something tells me he saw this coming lol. We were like literally just talking about it in the charts thread.

 

[jazz4cash]

The treasury yield curve peaks at 9 months right now. The market expects rate will be lower somewhere beyond 9-12 months. Or maybe 15 months. That’s why longer term CDs are in high demand. Citi is also showing the same 2% rate for 2,3,4 year terms. The risk premium for tying your funds up for a longer term is gone.

 

[Northforker]

Competition for short term CD's is fierce right now. Fidelity had a bunch of offers sell out yesterday and again this morning. I managed to nab 10k at 4% for 3 mos this morning, and 5% for 10k yesterday at 5% for 6 mo, looking for a short term parking spot for 35k Monday.

 

[f35phixer]

I also am wondering... I have a NFCU $190,000 for a year @.6% matures 1/9/2023. They right now have 3.05% for 12 months. I'm wondering how long these rates will last? I pay the penalty for early withdrawal and lock in 3.05 or can I wait....

 

[COcheesehead]

Nobody really knows the answer as to when to lock in a rate. There are clues out there if you can follow them. There is also a foolproof way…ladder them, stay true to the ladder - invest maturing funds on the long end. You’ll have some at the best rate, but also liquidity in the short term.

 

[Drake3287]

Competition for short term CD's is fierce right now. Fidelity had a bunch of offers sell out yesterday and again this morning. I managed to nab 10k at 4% for 3 mos this morning, and 5% for 10k yesterday at 5% for 6 mo, looking for a short term parking spot for 35k Monday.

Make sure you're using this Early Withdrawal Calculator. In all my years of having CD's, I've never really had the need to think about paying a penalty and reinvesting at a higher rate. Those days are currently over. With places like Ally only charging a 60 day penalty, even a 1% increase can pay for itself.


https://www.depositaccounts.com/TOOLS/BREAK-CD-CALCULATOR.ASPX

 

[Fermion]

Is that the biggest advantage of the short term treasuries? That they are so easy to sell if you need cash quickly?

 

[audreyh1]

Biggest advantage right now is they are paying the highest rates.

Plus interest is state tax free.

And yes they are highly liquid - easy to sell on the secondary market, but most buyers don’t expect to have to do this, so it’s a minor consideration.

 

[Sunset]

I also am wondering... I have a NFCU $190,000 for a year @.6% matures 1/9/2023. They right now have 3.05% for 12 months. I'm wondering how long these rates will last? I pay the penalty for early withdrawal and lock in 3.05 or can I wait....

3.05% is really low... why wouldn't you buy a 1 year T-bill at auction (which is easier than it sounds as you just say you want to buy it) for ~4.5%.

Should you break the current CD. If you can get more than 2.5% interest on the new investment and your penalty is 6 months (or less) the answer is YES.