State Bk India New York NY 3.4% CD

[almost there]

While looking at CD options at Vanguard, I see a 3.4% 10 yr CD.
"State Bk India New York NY CD 3.4%24"
Its insured by the FDIC, but State bank of India?
Is it as safe as any CD as its insured by the FDIC?
Or something to avoid? High risk CD? LOL LOL
Thoughts?

Plan to set up a CD ladder and this one stands out..........

 

[jetpack]

Interesting. I'm still learning about the brokered CDs. I do allocate some funds to CD ladders, so it'd seem more convenient to do it all in my vanguard account.

 

[almost there]

I called the FDIC and talked for about 20 minutes. Its solid.
Fully insured to 250k no problem.
Been in the USA since 1971 no problem. And if there is an issue its covered by the FDIC in a couple days. Looks pretty good! Am pleasantly surprised.

 

[brewer12345]

FDIC insured is FDIC insured. I don't like a 10 year term on a brokered CD because if rates spike you have take the beating instead of just surrendering for whatever the penalty is on a non-brokered CD. YMMV.

 

[samclem]

There's no way I'd buy a brokered CD with a 10 year term. When rates go up, the value of that thing will plummet and, unlike a CD bought straight from the bank, you can't get out of it and just accept the early withdrawal penalty. You've got to sell it (at a big hit) or hold it to maturity (earning maybe several points less interest for many years).

I think a far better bet would be a CD bought straight from the issuer that has a reasonable early withdrawal penalty. If interest rates go through the roof, you've got a relatively low-cost escape option. A penalty of 180 days of interest ain't much at the present low rates.

Edited to add: Ooops, I cross posted with Brewer. What he said.

 

[almost there]

So you don't think a laddered approach is the way to go?
Say $40k each in a 1/2/5/7/10

 

[brewer12345]

So you don't think a laddered approach is the way to go?
Say $40k each in a 1/2/5/7/10

That is up to you. Personally, I much, much prefer to have cheap embedded optionality in what is supposed to be my absolutely safe "ohsh!t" money. A 10 year brokered CD with a high duration (8? 9?) in a low interest rate environment does not meet that definition. I think a far smarter play is to buy CDs from the likes of Pen Fed, Navy Fed and any of the other "biggest bums" (Ally, Symphony, etc.) going as far out as needed to get a decent rate. The difference is that you have an option in the direct CDs to get your money out with only a nominal loss. The loss on a longer dated brokered CDs could be a lot higher than nominal.

 

[OAG]

Brokered CD's: Be prepared to hold to maturity or probably (possibly) lose money (even principal) to sell early on the open market.

Bank/CU CD's: Generally can be redeemed early for a penalty of interest (no loss of principal).

Also brokered are generally 10 year duration (versus lesser period for most Bank/CU CD's). You have already mentioned FDIC (important) but may be CALLABLE early at no penalty to the issuer.

Brewer: I did not mean to step all over your post.

 

[brewer12345]

No biggie, OAG.

Actually, brokered CDs come in almost any flavor or maturity imaginable. You can even get structured index-linked CDs in a dizzying array of permutations. So be aware that all sorts of things are available, and many of them have obvious and not-so-obvious downsides.

I will play Devil's advocate for a moment. If you are buying low risk fixed income, Brokered CDs of modest duration and above treasury coupons may be acceptable. A 3 or 4 year CD with a decent (2% or better) coupon might be fine in limited quantities if you are building a ladder and expect to hold to maturity (or close to it - liquidating a 4 year CD with 1 year to go would likely have limited downside). I just think that if you want to go longer you are far better off with direct CDs from a credit union or bank.

 

[Kimo]

I was all set to buy a cd directly with Ally but the interest penalty is bigger than I thought. I was putting 500,000 in a 5 year 2.4% cd which means I would receive 1000 monthly. When I asked about the penalty she said 12 months of income (12,000.00) That doesn't seem small to me....

 

[brewer12345]

I was all set to buy a cd directly with Ally but the interest penalty is bigger than I thought. I was putting 500,000 in a 5 year 2.4% cd which means I would receive 1000 monthly. When I asked about the penalty she said 12 months of income (12,000.00) That doesn't seem small to me....

I usually look for a 6 months of interest penalty, which is what Pen Fed and Navy Fed do for 5 year CDs.

 

[Kimo]

Thanks brewer....since that post I did try another bank with the same answer, I will try your suggestions.

 

[almost there]

All good advice. Its in an IRA so the plan is not to bother it for many moons. Unless I do a 72T, I have 6 1/2 yrs. to 59 1/2. So, Its probably not going to be disturbed. For the past 2 years I keep thinking the rates are going to go up, not sure what Yellen is thinking.......... When it does go it will probably be .25 every 6 months or year for quite a while....... Not too much to look forward to. LOL LOL

 

[samclem]

So you don't think a laddered approach is the way to go?
Say $40k each in a 1/2/5/7/10

No, there's no problem with the ladder. It's the brokered CDs, rather than direct ones, particularly for the very long ones. A lot can happen in ten years. I see that you intend to hold them, but if rates go to 6% and inflation is at 4%, it's not just the opportunity cost of losing out on the chance to get 6%--you'll actually be losing buying power on that money, maybe for a the majority of a decade.
The fact that you nor anyone else can predict future interest rates with any accuracy is an argument against brokered CDs, regardless of the rate they offer. And to take the risk for this tiny increment of increased return just doesn't seem like a good idea. Just my opinion.

 

[daylatedollarshort]

I have a retirement account where the only CD option is to buy brokered CDs or I would also go the credit union CD route.

For years I have been buying brokered FDIC CDs from every bank associated with whatever unstable economy or government I can find since the rates are usually higher. So far so good. I just ladder the CDs and spread the money around plus with FDIC insurance, why not?

 

[almost there]

I don't like 10 yr CD's either....... But its starting to look like Japan around here.........

FDIC insured is FDIC insured. I don't like a 10 year term on a brokered CD because if rates spike you have take the beating instead of just surrendering for whatever the penalty is on a non-brokered CD. YMMV.

 

[CoolChange]

I usually look for a 6 months of interest penalty, which is what Pen Fed and Navy Fed do for 5 year CDs.

The last time I checked State Farm Bank, their 5 year rates were comparable to Ally, EverBank, etc. But, the penalty at State Farm Bank was still only 6 months of interest. Not as good as the Pen Fed specials but better terms than I am seeing with the better known online banks.

Good luck.

 

[brewer12345]

The last time I checked State Farm Bank, their 5 year rates were comparable to Ally, EverBank, etc. But, the penalty at State Farm Bank was still only 6 months of interest. Not as good as the Pen Fed specials but better terms than I am seeing with the better known online banks.

Good luck.

Actually, I am comfy with a year of interest if the terms are good enough on a longer CD. I did not flinch at that surrender penalty when Pen Fed had their silly 10 year 5% CD offer. I would suggest that terms are not all that attractive for a 5 year CD and a year interest penalty.

 

[Masquernom]

Almost There, I'd ladder the 5 yr, 7 yr, and 10 yr CD's. That will get you about 2.88 % to start. After 5 years you'll be able to reinvest the maturing CD's into new 10 yr CD's and then every 2 to 3 years after.

You can also buy individual corporate bonds for higher rates. You can ladder higher interest shorter bonds, and longer term CD's for instance.

 

[kramer]

My Vanguard mailing address is in Texas, and I can't buy the State Bank of India CD's due to Blue Sky laws. As near as I understand, there are more regulatory hurdles in the Blue Sky states and some banks don't bother to hurdle them all. So I think the State Bank of India CD's are only available in 47 states. Otherwise, I would be interested.

If you are logged into your Vanguard account, and your address is in one of those three states, the CD won't show up when pull up the new issue CDs available for a certain maturity. This is probably true for other brokerages, also.

 

[Running_Man]

So you don't think a laddered approach is the way to go?
Say $40k each in a 1/2/5/7/10

There are pro's and cons to laddered CD's. In general a ladder even up to a 10 year rate is a very conservative way to approach fixed income investing, especially after the initial 10 year period setting up the ladder and having all true 10 year instruments at the time of issue. It has been 23 years since we have had a 4% inflation print number for an entire year, we have surpassed 3.4% inflation for a year once in that time period. And there is little risk difference other than liquidity between a brokered CD and a 10 year US treasury bond and the brokered CD you quoted is paying 1% more than a 10 year bond.

The Federal Reserve's concern is deflation not inflation, they are warning they do not think they will see even 2% inflation until 2018 at the earliest. Of course at that point the relevant rate will be the 5-6 year CD rate and not the 10 year rate and it is very possible that rates will not be higher at that point.

In all the studying I have done on bond ladders a 10 year US Treasury bond ladder return has consisitently exceeded the inflation rate over most periods and the implied return of this CD 3.4% is 1.8% over the current year over year inflation of 1.6% is a little lower than what historical expectation for 10 year treasury bonds should offer over inflation which would be about 2 percent and a brokered CD should offer a premium above that rate. But in a world where the national governments are controlling interest rates, predicting what these will do in the future is a fool's game and there is no forcing at the present time the market to offer historically appropriate interest rates.

 

[almost there]

FWIW, its not listed today on the Vanguard site? Hmmm

 

[Kimo]

FWIW, its not listed today on the Vanguard site? Hmmm

I called Vanguard, they told me it sold out yesterday.

 

[karluk]

FWIW, its not listed today on the Vanguard site? Hmmm

I don't know why this 3.4% CD is no longer listed, but one factor may be that U.S. treasuries are in the midst of a furious rally. Ten year t-notes are currently yielding only 2.05% after briefly touching 1.88% earlier today. Only a week ago their yield was 2.3%. This is such a huge decline in such a short period of time that it's tempting to speculate that the bank has decided that they no longer have to offer a 3.4% yield on a ten year CD to attract customers and has withdrawn the offer.

That's the flip side to interest rate risk. Interest rates can go down as well as up, even starting from already low rates. Locking in 3.4% when you had the chance might turn out to have been a good choice. It all depends on how interest rates change in the future, and that's something that is awfully hard to predict.

 

[almost there]

Agree, today may be a game changer. Have been sitting out for quite a while. Does not bother me a bit.

They cant go too much further down, unless we go negative. LOL LOL