According to its website, EverBank is now offering a so-called 3 Year LIBOR Index CD.
The product, which is issued without a prospectus, appears from the information on EverBank’s website to be three years in duration, yet based on the 3 month London Interbank Offer Rate (LIBOR) plus 25 basis points. The product resets quarterly (on March 1, June 1, September 1 and December 1) although it is unclear what rate a deposit receives from the date of deposit until the first reset date.
It absolutely makes sense to position oneself for higher interest rates in the US, especially since they are very likely to be increased following the election of Donald Trump. In a prior article, I have indicated that depositors should protect themselves by avoiding (or selling) bonds at this point and favor savings over CDs, even short term CDs with low early withdrawal fees.
Protecting yourself from rising interest rates is easy. But, positioning yourself to benefit financially from rising interest rates is much more difficult.
The 3-month US dollar denominated LIBOR Rate has moved dramatically over the course of 2016. It began the year at 40 basis points, and recently spiked as high as 88 basis points to a 5-year high.
In 2017 and beyond, we will have a US Federal Reserve, a global economic backdrop (with extremely low rates outside the US acting to keep US short-term rates very low) and a worldwide economic environment all acting to continue to compress US short-term rates and ensure that they will only move up very, very slowly for many years.
Even if the rate were to move to 1.5% (almost twice where it is today) over the next three years, which I view as highly unlikely, the EverBank product would yield only 1.75%, which is hardly a very attractive rate of return on money that is tied up for 3 years.
See the best 3 Year CD rates here. (Hint: EverBank itself is offering a fixed rate without the risk that is comparable with the above best-case scenario.)
Rather than invest money with a 3 year time horizon and tie it to the short end of the interest rate curve, investors and depositors with that type of horizon should look for ways to benefit from a move in the 10-year US Treasury from 2.3% to 3.5% or a move in the 30-year US Treasury from 3% to 4% or 5%.
This exposure is most easily achieved by investing in major insurance companies (Berkshire Hathaway, Aflac) and money center banks (Bank of America, Citibank, JP Morgan) that have business models that leverage the interest rate spread. It is also achieved through structured notes offered through brokers like Morgan Stanley and Merrill Lynch that can generate interest rates tied directly to the 10-year US Treasury rate or the spread between the short end of the curve and the long end.
Investors and depositors will not make money by betting on a dramatic rise in the short end of the curve, as the EverBank product does. 3-Month LIBOR will remain compressed at or around current levels for the next several years and the money that you would otherwise allocate to this product should just stay in cash.
Note: EverBank is perhaps the most aggressive bank in the US when it comes to pushing the line between the definition of a CD, or certificate of deposit, and an investment product. The Jacksonville-based bank has in the past offered investment products tied to emerging market currencies, emerging market investment indices, precious metals and interest rates. EverBank designates these products as CDs on the basis that their principal is guaranteed by the bank, and therefore FDIC insured. In 2009, investors lost money in products designated by EverBank as CDs, although these products are now often structured so that, while the investor or depositor does not accrue any gain, they do not lose principal. These products are always issued by EverBank without a prospectus or a SEC registration; EverBank, unlike virtually any other bank in the US, believes that it is exempt from the registration requirements in the Securities and Exchange Act of 1933 as it is a bank as defined in Article 3(a)(2) of that Act.
In August 2016, EverBank reached an agreement to be acquired by TIAA-CREF. TIAA has mismanaged retirement assets for employees of universities and nonprofits for decades. If consummated, the TIAA acquisition, in all likelihood, will mark an end of EverBank’s issuing of investment products labeled as CDs without a 1933 Act prospectus.