6-Month 2.20% Promotional CDs Are a Come-On

6-Month 2.20% Promotional CDs Are a Come-On

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About a year ago, some major investment banks began offering their clients promotional CD rates through their licensed banking subsidiaries.   Their rates have been higher than nationally available rates and were offered only for “new money”.   Their goal was to get their customers to move money back into their institutions from outside by offering customers short duration CDs with rates slightly above anything they would likely find on BestCashCow.com or Bankrate.

I am told by brokers at some of these institutions that they again have new short-term CD offerings out there.  The best offer that I have personally seen is a 2.20% 6-month CD which is being offered through June 5, 2018.   While BestCashCow shows nationally available online bank, locally available bank, and credit union 1-year CD rates above those levels, it does not currently show that 6-month CD rates are available at rates this high (see the highest online 6 month rates here).  One broker told me that these offerings are selling about as hot as the Kilauea caldera right now (his words, not mine).

To be clear, these CDs are basically treated as brokered CDs.   We don’t like brokered CDs – especially not in a rising interest rate environment – for reasons I enumerated at the end of an article that I wrote last month.   You are essentially locked into these CDs and cannot easily get out even with the payment of an early termination fee.  Of course, with a six-month CD, the risks associated with being locked-in are more tolerable than those of even a 1-year CD.

With a six-month product, another serious question is whether you are even picking up anything by making the move from an online bank to one of these products.  If you are making 1.80% or even 1.70% on $250,000 in an online savings account right now (see the best savings rates today) and believe that rates will go no higher in the short term, you could presumably pick up about $500 to $600 over the next six months by moving your money into one of these products.

But, it is going to take you at least a day to move your money electronically (by ACH) from your online bank to your investment banking account to take advantage of this offer.   Once there it is going to take another day for this investment bank to sweep it into your cash account and deem it to be “new money” and another three business days for the purchase to ‘settle” (i.e., for the CD to be initiated).  All tolled, you are losing a full week of interest.  Then, you will probably lose another couple of days of interest trying to get money back into your online savings account in six months when the CD matures (especially if maturity is on a Friday or Saturday).

All of the sudden, much or all of your gains are completely evaporating, making staying in savings are better strategy, especially when you also consider the loss of liquidity and the likelihood of savings rates increasing over the coming months.

Our tip: Stay in online savings.


The 10-Year Crosses 3% - As Public Interest in CDs Increases, Avoid Brokered CDs

The 10-Year Crosses 3% - As Public Interest in CDs Increases, Avoid Brokered CDs

Rate information contained on this page may have changed. Please find latest cd rates.

I have come across a lot of people recently who believe that this is the time to lock into long-term CDs now that the US 10-Year Treasury has crossed 3%.   I believe that both short-term and long-term interest rates will be much higher at the end of 2019 as the Fed continues to raise the Fed Funds rate.   I would not encourage anyone to buy anything longer than a one-year CD.

Even if you disagree with me and insist on buying long-term CDs now, you must protect yourself from the possibility of dramatically higher interest rates within the next year or two.  You do this by looking for only those CDs that have the most reasonable early withdrawal penalties. 

Learn more about early withdrawal penalties and the possibility, albeit remote, that a bank or credit union may refuse to allow early termination of a CD, even with payment of a penalty, here.  You should also read our 65 questions to ask if you are new to CDs before making any purchase.

About 4 years ago, I wrote an article advising people to avoid fraudulent websites offering too-good-to-be-true brokered CD rates

Someone purporting to be a financial advisor commented on the article yesterday advising that their brokerage now, for the first time, offers 5-year brokered CDs that are higher than the highest rates shown on this site.  While the comment is not germane to the article on which it was placed, I want to address it.

First, the rates that the commenter cites are not higher than rates shown on BestCashCow.  I’ve reviewed the brokered CD rates offered by Morgan Stanley and Merrill Lynch this morning.   Neither is offering a 5-year brokered CD above 3%.  They are both offering 10-year brokered CDs at 3.15% (you should absolutely avoid anything longer than 5 years).

Second, in addition to online CD rates, we also show local rates and credit union rates.   Depending on where you live, you will likely now find 5-year CD rates that are above 3.00% on BestCashCow.

Third, if you are going to fight the reality of rising interest rates, you need to give yourself the best ability possible to get out if you need the money or are wrong about the direction of interest rates.  Brokered CDs do not have early withdrawal penalties.  If you need to exit a brokered CD early, you are dealing with a secondary market, and that basically means that you are selling to the brokers at their ask price.  If you buy a 10-year brokered CD from your broker now at 3.15% and need to exit it in 18 months, you will likely take a huge bath.   Even if you buy a 5-year brokered CD at 3%, you are going to lose a lot of money.

Brokered CDs have a very different risk profile from online or bank or credit union-issued CDs.   If you want to take that bet that they offer on rates, then you should buy bonds (which we also don’t recommend).     


I Bought a Long-Term CD and Rates Have Moved Higher, What Should I Do?

I Bought a Long-Term CD and Rates Have Moved Higher, What Should I Do?

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As interest rates have moved up on longer-term CDs, many have found themselves in a quandary over what to do about longer-term CDs that they may have purchased over the last couple of years and that are now yielding less than the going rate.

In fact, I myself find myself in such a position, having purchased a 5-year CD from a major online back 2 years ago at 2.25%.   With BestCashCow now showing 3-year CD rates at 2.60% and with the ability to get out of the CD with a 6-month early withdrawal penalty, I can already cover my losses from the penalty by rolling into a higher yielding CD.

With rates points to rise still further, this strategy locks into one early withdrawal penalty and runs a high risk of a second one.   It accomplishes little other than a psychological benefit of allowing me to feel like I am still getting the best CD rate.

Since rates may rise further between now and the end of the year, and still further into next year, I have chosen to adopt a separate strategy.   My strategy involves resolving, as I have, that I will ultimately need or want to terminate the CD that is earning 2.25% before the end of its term three years from now.   That will cost me 6 months of interest (or 1.25% the initial CD price) whenever I pull the trigger.    But, rather than do this now and risk getting another CD which may quickly wind up paying below the best rates, I have decided to treat this outstanding CD as if it were cash or a short term CD.  Since 2.25% is still better than what I can get in a savings or a one-year CD, I will hold the CD for now.

When savings and short term CD rates have moved meaningfully above 2.25%, I will reconsider my position (unless there is only a very short period left of the CD at that time).

This situation underscores the importance of looking for CDs with reasonable early-withdrawal penalties.   We consider 3 months of interest to be a reasonable penalty on a 1-year CD and 6 months of interest to be a reasonable penalty on a CD longer than 1 year.   Also, as we noted in this article, the bank or credit union’s terms may grant it discretion whether to honor your early withdrawal request.   You can lessen the risk of an early withdrawal being denied by only opening CDs with larger, recognized online banks.