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1-Year CD Rates from Online Banks 2023

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5 Reasons Why You Should Never Ever Buy A Structured Note

Morgan Stanley, Goldman Sachs and second-tier full service brokerages make a real market in structured notes.   So-called "structured notes" are intricate products that carry the possibility of earning a much higher interest rate that a savings or money market account or even a certificate of deposit, but also bear the risk of earning nothing on your cash over extremely long periods of time.

The reasons why brokerages push these instruments are very clear.   Their base product (access to markets, advisory) has been proven to lack any compelling characteristics for a generation.   Online brokers, such as Schwab, ETrade, Ally Invest offer access at a fraction the cost (sometimes at no cost) and provide access to research that is just as compelling.

Against the backdrop of a marketplace that has become anachronistic, these full service brokers have tried to maintain their upper middle class clientele by offering them compelling debt products.   Until the last decade, they managed to hang on to a rather brisk business in municipal bonds.   Yields on municipal bonds have fallen dramatically over the last decade making them less sexy, and, unless Trump is soundly defeated, many municipalities face certain bankruptcy, leaving municipals neither sexy nor appropriate investments.

What did become sexy is a structured note.   This is where, for example, your broker calls you and says: “I can get you into an offering from JP Morgan Chase that yields up to 10% a year.   It is based on the spread between the 2-year Treasury and the 30-year Treasury and it gives you 5x that spread.”   And, that sounds especially intoxicating when even the best savings and money market rates are less than one percent.

But, here is why you should hang up on your broker:

1.The maturity on these things is usually between 15 and 20 years (sometimes longer).   You will be illiquid during that entire time.   Whereas you can ordinarily get out of a CD for a small penalty, these instruments can and do trade well below par (sometimes as low as half of par).   Brokers make a killing on controlling a secondary market for these and are counting on your need to get out before maturity.

2. No matter what your broker says or is instructed to say on the phone, these are not based on Treasury rates.   They are based on some obscure measure listed on some back page of Bloomberg that can be easily manipulated for the issuer or made to go away.   For many years, these were issued based on CMS and then they made CMS go away.   Read the prospectus, read it carefully, and then assume someone is trying to screw with you.

3. Structured Notes are a tax nightmare.   If you read the prospectus on these instruments, you will see that your broker is ordinarily getting a 3.50% commission on the sale of these notes and you may think that is harmless enough, but the problem is that your basis is 96.50% of what you think it is, and you are going to be taxed on the difference between that amount and 100% over time.   That tax is called original issue discount and it shows up as on your 1099 every year that you own one of these things.  And, that is just the beginning.   There are all sorts of other ways that you can have imputed income and be taxed on it with these things.

4. If you die before these mature, you are creating a nightmare for your executor.   To boot, your heirs are going to see a fraction of what you have invested in these things (see point 1 above).

5. Nobody should ever buy a friend.   Your broker has entered into a profession that is heading towards obsolescence.   A 3.50% commission on the sale of one of these instruments may enable them to meet their mortgage payment next month and you may feel good about that, but you are going to own these things long after your friendship has ended.  And, your financial wellbeing is not out making friends.

The bottom line: I am speaking from experience here.   Even though I was trained as a tax attorney, the multiple courses that I took in pricing of fixed income at Columbia Business School, I got roped into these things.  They are a disaster.   

1-Year CD Rates Over 2% Are Tempting But Preserving Liquidity In A Crisis Is Essential

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BestCashCow today shows online banks offering one-year CD rates as high as 2.28%.    Depending on where you live, you may also find local banks or credit unions near where you live that have 1-year CD rates at or around that level.

It is very compelling to want to rush into 1-year CDs at or around that level with any FDIC-insured bank up to FDIC limits.   Savings rates are still strong, but they seem guaranteed to fall further as we work our way through 2020.

But, it also seems to me that it is an especially important time to think very, very differently about liquidity than we may have ever thought about it before.   As we work our way through a COVID-19 crisis that is certain to become more and more profound over the next several months with a desperate President.

If you anticipate that you might be economically vulnerable through a loss of job or sickness, the next year would be an important time to keep your liquidity.

Those who are not economically vulnerable and are certain to have the resources to get to the other side of the Coronavirus pandemic will also want to be certain that they have the liquidity to take advantage of opportunities that we will certainly see in equity and bond markets over the summer and fall as it proves difficult to safely reopen the economy.    Opportunities to invest in real estate and in struggling small businesses where you live are almost certain to emerge as well.

Finally, when I encourage people to be careful to preserve their liquidity, they often tell me that they can always get their money out of CDs with the payment of an early withdrawal penalty.   I would encourage these folks to read this article that I wrote in 2016.   Banks and credit unions retain discretion to deny early withdrawal request, and while it is exceedingly rare, we really do not know what steps banks may need to take to preserve their positions as we get through 2020. 

BestCashCow has always advocated that consumers keep large percentages of their assets in cash for difficult periods and that they make the most of their cash by seeking the highest returns available.   This next year, however, could be an important time to favor liquidity over the premiums that short-term CDs may offer.

If you insist on locking down a rate, no penalty CDs may offer a solution.   You’ll find those rates listed among our special CD products here.

Some 1-Year CDs Are Still over 2% APY Following the Coronavirus-Induced Fed Cut

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We’ve read and heard a lot of financial markets information since the Federal Reserve’s emergency rate cut last Tuesday in response to the spread of Coronavirus.

By the end of the week, 10-year US Treasuries were trading under 70 basis points.

I’ve seen articles recommending people buy US Treasuries.   Although we did not anticipate Coronavirus or anything like it in the fall and warned then against long-term bonds, we continue to highlight extraordinary risks to principal in long-term low yielding instruments should rates rise before maturity.   Hence, US Treasuries are inappropriate now for non-institutional investors.

Likewise, this article in a well-respected publication over the weekend caught my attention.   In the first half of the article, the author is citing an opportunity in Series EE and Series I bonds.  These US government instruments are fully detailed here, but because of the limits they are inappropriate for most.   (Also, those with accounts at Merrill and Morgan have access to other, higher yielding instruments that are tied to CPI-U).

The second half of the same article cites what the author seems to believe is an extraordinary opportunity in municipal bonds.   The author points out that, for those in the highest tax brackets, a 10-year municipal trading at 90 basis points has a tax equivalent yield of almost 1.40%, but fails to point out the illiquidity of municipals, that this illiquidity causes still greater risk to principal should rates rise over the course of the bonds (and they will), or that some (perhaps many) municipalities will face credit problems the longer the Coronavirus crisis lingers.

There may be a temptation to believe that interest rates are going to be low forever when you watch the incompetent response of the Trump Administration.  But, in one year, you could easily be looking back at your actions as having been too rash. 

Think about whether you really want to make a bet that interest rates in the US are going to be low forever.

If you believe that Gilead and our medical professionals are going to get a handle on this crisis over the next year, you should be buying 1-year CDs.   With many on offer still above 2%, this is a much more sensible place to let your assets hang out.   And, in the worst case, you’ll be liquid in a year.  

Check online CD rates here.

Compare local CD rates where you live here.