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Posted by Gil Faver on February 13, 2008, 12:55 pm
ok, T-Bill rates have sunk well below CD rates, for the time being. A
friend has a lot of money in a 6 month T-Bill ladder, and wants to see if he
can increase yield. CDs would be better, but even if he puts a couple
hundred thousand in each CD institution (well over the FDIC limit) he would
need a dozen CDs.
any other alternative?
What is the scoop on "brokered CDs"? costs/fees?
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Posted by John A. Weeks III on February 13, 2008, 1:45 pm
In article
> ok, T-Bill rates have sunk well below CD rates, for the time being. A
> friend has a lot of money in a 6 month T-Bill ladder, and wants to see if he
> can increase yield. CDs would be better, but even if he puts a couple
> hundred thousand in each CD institution (well over the FDIC limit) he would
> need a dozen CDs.
>
> any other alternative?
>
> What is the scoop on "brokered CDs"? costs/fees?
Brokered CD's are traded by big brokerage houses and some banks.
You get access to all kinds of CDs that your local bank doesn't
handle. For example, people may sell off their CDs to use the
cash elsewhere, and the brokerages act as a secondary market
for this paper.
I just bought some this morning. Treasuries were in the 2% range.
The best 90 day CD was at 3.29%. I picked up some brokered CDs
at 3.45% and 3.50% return in the 4 and 5 month horizon.
The fees are built into the yield, so the broker quotes you the
rate that you will get.
I have no idea how the insurance works. The individual CDs are
FDIC insured. I rarely buy fixed income, and I don't put more
than $5K at any one institution incase something goes bad.
That is obviously not the scale that your friend is working on.
The other item that my broker suggested was taxable munis. You
can find rates over 6%, but you are looking at a year or more
tie up. I didn't want to tie my funds up that long since I am
looking for a turn-around in the 3rd quarter and I want cash
to invest at that time.
-john-
--
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John A. Weeks III 612-720-2854 john@johnweeks.com
Newave Communications http://www.johnweeks.com
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Posted by Elle on February 13, 2008, 2:06 pm
> What is the scoop on "brokered CDs"? costs/fees?
I have a few brokered CDs I was thinking about selling
recently. They are with Fidelity. The commission for selling
them online is $1 per $1000 value, with a minimum commission
of $8 required. I expect the cost of buying a secondary
market CD is the same.
One problem it seems to me is that the market for secondary
market CDs is small. With Fidelity at least, pricing
information is not all that readily available. At Fidelity,
ISTM one has to work with a live representative to trade in
secondary market CDs efficiently. Even then, it may not be
financially efficient. Secondary market CDs are going to pay
the same rates as new issue CDs. The risk is the same,
assuming all are FDIC insured. So I would say because many
more new issue CDs are available, they are easier to buy.
Plus your friend is likely stuck with the problem of having
over a dozen CDs, even if purchased on the secondary market.
The alternative is either to stick with laddering or be
patient. Laddering will smooth out drops in the benchmark
interest rate and its effects on CDs. Patience can pay,
since inflation looms, and rates are going to go back up at
some point. As usual, slow and easy wins the race.
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Posted by on February 13, 2008, 5:54 pm
> ok, T-Bill rates have sunk well below CD rates, for the time being. A
> friend has a lot of money in a 6 month T-Bill ladder, and wants to see if he
> can increase yield. CDs would be better, but even if he puts a couple
> hundred thousand in each CD institution (well over the FDIC limit) he would
> need a dozen CDs.
Warning, opinion ahead :).
Federal bank governors, including Bernanke, often talk tough about
inflation, but they are clearly pansies who will cut the Fed Funds
rate and take other steps to avoid "systemic risk". There used to be a
Greenspan put, and now there is a Bernanke put. The recent Tuesday
morning surprise 75bp cut in the face of plunging stock markets was a
dramatic example. I am confident in predicting that the Federal
Reserve will never let bank depositors, especially those of big banks,
lose their capital. If a big bank such as Citigroup got in trouble,
they would entice some other bank to take it over and protect the
depositors. Shareholders and possibly bondholders would be allowed to
take a loss, but not depositors in plain-vanilla instruments such as
bank CDs. The Federal Reserve will do anything to prevent a run on the
banks, which might be precipitated by a default on the CDs, savings,
or checking accounts of a bank. So I would not lose much sleep over
having amounts of money, over the FDIC limits, on deposit at a bank,
except for liquidity concerns. If a bank failed it might take some
time for accounts to be unfrozen.
In the UK, I believe their central bank is guaranteeing the deposits
of the Northern Rock to prevent a bank run. The same thing would
happen here. I could be wrong about this, of course. Nor am I saying
there is a free lunch. The side-effect of what I see as an implicit
Fed guarantee of all banking deposits is that monetary policy is
looser than it otherwise would be, and inflation is higher.
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Posted by joetaxpayer on February 13, 2008, 6:11 pm
beliavsky@aol.com wrote:
> So I would not lose much sleep over
> having amounts of money, over the FDIC limits, on deposit at a bank,
> except for liquidity concerns. If a bank failed it might take some
> time for accounts to be unfrozen.
The time and effort to buy the brokered CDs, and thus eliminate that
risk (of inconvenience if nothing else) is minimal. The FDIC limits are
stated, and while I agree that the government will likely not let banks
fail, assuming you'll get back the excess deposits is not what I'd
advise. (not to mention the better rates one finds on those CDs. )
JOE
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