questions about vanguard secondary market CDs

[Earl E Retyre]

Hi all,
I have never bought a secondary market brokered CD (on vanguard) before. I currently see a CD (cusip 94986TV61) for Wells Fargo Bank that has a coupon of 3.0% matures on 6/26/2029 and is Callable 09/23@100. It says it is a Multi-Step Coupon with a yield to worst at 5.049%. It has a bid at 6.879. So, here are all my questions:

(1) if I wanted to buy this CD, can I place a bid higher than the asking price of 5.049%? I cannot find where on the Vanguard page I can offer a higher bid?

(2) Since it says yield to worst is 5.049%, I assume I do not need to worry about the fact that it is a multistep coupon since as long as I hold it until maturity, I am guaranteed 5.049%. True?

(3) Since the original coupon is 3%, my understanding is that this CD will likely never be called, and I can lock in 5.049% for 6 years (or higher if I can bid a higher % (see question 1). Is my understanding correct? Seems like a good deal to me since I would be thrilled to lock in over 5% for over 5 years.

 

[Rianne]

I can't answer your question, but I'm interested in the answer. Hopefully, a knowledgeable poster will reply.

 

[njhowie]

Hi all,
I have never bought a secondary market brokered CD (on vanguard) before. I currently see a CD (cusip 94986TV61) for Wells Fargo Bank that has a coupon of 3.0% matures on 6/26/2029 and is Callable 09/23@100. It says it is a Multi-Step Coupon with a yield to worst at 5.049%. It has a bid at 6.879. So, here are all my questions:

(1) if I wanted to buy this CD, can I place a bid higher than the asking price of 5.049%? I cannot find where on the Vanguard page I can offer a higher bid?

(2) Since it says yield to worst is 5.049%, I assume I do not need to worry about the fact that it is a multistep coupon since as long as I hold it until maturity, I am guaranteed 5.049%. True?

(3) Since the original coupon is 3%, my understanding is that this CD will likely never be called, and I can lock in 5.049% for 6 years (or higher if I can bid a higher % (see question 1). Is my understanding correct? Seems like a good deal to me since I would be thrilled to lock in over 5% for over 5 years.

1) I don't know if Vanguard lets you place bids, Fidelity certainly does. When you place a bid, you do it by price. You would submit with a price lower than the ask showing. You can easily figure it out - start to place an order and just don't hit the submit button. See what screen it presents to you and then you'll know if you can submit a bid. If you are on that screen, and there is no place to enter your own bid, then they likely do not provide for it. If brokerage capability is what you're primarily interested in, get an account with a real broker, like Schwab or Fidelity.


2) Correct. This step CD resets on 6/26/26, 6/26/28, and matures 6/26/29. The actual YTW is going to be dependent on the actual price you pay and factoring any commission Vanguard charges for the trade. The CD is callable every 3 months. However, with the current yield of 3.0% through 6/26/26, there is a very low chance that it is called. It goes to 4% on 6/26/26 through 6/26/28, and then 5% through maturity on 6/26/29. So, at the reset dates, there is higher probability that they get called. Since fair value is currently 92.303, assuming you pay a price around that amount, if it were called, you would collect the difference up to 100.0 which would be capital gain.


3) Again, as mentioned above, it is callable every 3 months between now and maturity. Should interest rates come down, they would be called early. But, again, at that time, you'd collect 100.0, which effectively increases your YTM. Use Fidelity's price yield calculator to see what your effective yield would be with various call dates and playing with the numbers:
https://digital.fidelity.com/prgw/digital/priceyieldcalc/

 

[Earl E Retyre]

Thanks, @njhowie!! I went ahead and purchased $10k via Vanguard. Vanguard does not seem to allow for a different bid value. I logged onto my Fidelity account and I can see how it does allow you to bid a different value. However, Fidelity did not offer this CUSIP.

I think I got a good deal since I locked in an effective 5.05% for 6 years which I wanted. However, it is extremely confusing and difficult to reflect in my own personal spreadsheet since it is paying 3% on face value and then steps up on certain dates but gives me an overall effective rate of 5.05%. I figured out a way to reflect it that is not perfectly accurate and gives me the gist. I hate having an imperfect spreadsheet but getting the deal is more important than my spreadsheet.

This is a learning process for me so I only wanted to do $10k. When I went back into Vanguard, I do not think this CUSIP is offered any more so maybe I bought the last $10k.

 

[njhowie]

Thanks, @njhowie!! I went ahead and purchased $10k via Vanguard. Vanguard does not seem to allow for a different bid value. I logged onto my Fidelity account and I can see how it does allow you to bid a different value. However, Fidelity did not offer this CUSIP.

I think I got a good deal since I locked in an effective 5.05% for 6 years which I wanted. However, it is extremely confusing and difficult to reflect in my own personal spreadsheet since it is paying 3% on face value and then steps up on certain dates but gives me an overall effective rate of 5.05%. I figured out a way to reflect it that is not perfectly accurate and gives me the gist. I hate having an imperfect spreadsheet but getting the deal is more important than my spreadsheet.

This is a learning process for me so I only wanted to do $10k. When I went back into Vanguard, I do not think this CUSIP is offered any more so maybe I bought the last $10k.

Good job! Over time you'll get more comfortable with it to the point where you may prefer it to buying new issue, simply because you can do better.

Because the initial rate yours is paying is just 3%, it likely won't be called. However, you can never be so sure - as I mentioned on another thread, I have a 3.4% CD that does not mature until Dec 2024, but the bank decided to call it this month. If yours does get called, it will likely be on one of the reset dates where the rate is moving up to 4% or 5%, depending what market rates are at the time.

You may have gotten the last $10k of what someone was selling today. However, in the secondary market, anyone can decide to sell at any time - it's little different than the stock market, but with CDs. So, depending on what market rates are on any particular day, someone may have incentive to sell theirs.

As far as how to account for it in a spreadsheet, there are a number of ways to deal with it. I would be conservative whatever method you choose.

 

[rayvt]

When I went back into Vanguard, I do not think this CUSIP is offered any more so maybe I bought the last $10k.

Yes, that's a thing that surprised me when I started looking at brokered CDs. One evening I was looking at (new) brokered CDs and saw one I liked, so the next day I went in to order it-----and it was nowhere to be found! The good ones sell out fast. You can't even wait until the day before the settlement date, because the entire allotment will all be claimed by then.