A Five-Year Certificate of Deposit Paying 3% in 2018 - Revisited

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When we began 2018, I wrote an article predicting that that we would see 5-Year CDs offering 3% in 2018, and recommending that depositors wait for the 3-handle before pulling the trigger and buying these products.

We have seen 5-year CD, offered in some markets, that yield 3% for over a month.   Now, midway though 2018, we see 3% CDs offered nationally.  This morning, with Marcus raising their 5-year CD to 3%, we even see the better-known names beginning to hit 3%.

Given that rates have been compressed for over a decade, a 3% rate seems like an attractive place to lock-in for the long-term.   Even with the Fed raising rates, many are predicting that we have seen the top of long-term rates, and even more are predicting that the President’s disastrous economic policies will throw the economy into a tailspin that will force the Fed to curtail its actions. 

We, however, think it is equally likely that the Fed will be forced to move still faster to fight off incipient inflation caused by poor China policy.  It is possible, if not likely, that 5-year CDs will rise to 4% by this time next year.  Therefore, we’d recommend depositors continue to focus on savings and shorter-term CDs.

If you do decide to invest in long-term CDs, we strongly recommend doing so judiciously and looking for lower early withdrawal penalties.   Capital One, Barclays and Sallie Mae all offer 5-year CDs with a 6-months penalty should rates rise or should you need the money.   Marcus’s 5-year CD penalty is 270 days.   We would avoid those products that have penalties of 1-year or longer.

Read our 65 Questions to Ask Before Choosing a CD.


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

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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?

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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.


The Return of the 6-Month CD

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I am only in my forties, but I have been told by my seniors of an era of largely stable interest rates when 6-month CDs offered depositors the ability to earn a premium over savings or money market rates, without the burden of locking up their money for as long as a year.

Of course, it makes sense in any environment where interest rates are stable or increasing that depositors would be rewarded, albeit marginally, for locking up their money for 182 or 183 days.   However, in the post-2008 period, of course, depositors have not seen 6-month CDs that offer a premium over savings rates.   Even over the last several years when savings and money market rates have been slowing moving up as the Federal Reserve raised the Fed Funds rate from zero to 1.25%, the best 6-month CD rates have been largely below the best savings rates. 

With consensus estimates that the Federal Reserve is poised to raise interest rates 3 or 4 times in 2018, last week we finally saw the emergence of 6-month rates that are better than the best savings rates.  

As of this writing, the best online savings rate is 1.80% and the best 6-month CD is 1.95% APY.   (Local rates where you live may be higher.  Check local bank savings rates here, and local credit union savings rates here.   See local bank 6-month CD rates here and local credit union 6-month CD rates here).

We don’t believe that a 15 basis point premium over savings is worth chasing.  Over 6 months, it amounts to 7.5 basis points which after tax is about 4 basis points.  In other words, you are looking at a gain of $100 on $250,000.

Nonetheless, for many people who would otherwise consider short-term CDs, but have shied away from locking up their money for periods of 1 year or longer, the return of the 6-month CD is an interesting development. 


EverBank’s 3-Year Petrol Currency Marketsafe CD: A Different View on A Dirty Pool

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We’ve written before, multiple times, about EverBank’s currency CD program.   We addressed these products most recently here, having first addressed them here.  

The EverBank 3-Year Petrol Currency Marketsafe CD - like the earlier EverBank products on which it is based - is not a CDs at all.   A CD is a time deposit guaranteed to compensate the depositor with a certain rate of return as consideration for keeping their money with the issuing bank for a certain period of time.  EverBank's so-called CD is an investment product designed to exploit unsuspecting people without any currency knowledge or wherewithal and to get them into a product that is more likely than not to deliver no return whatsoever over a long period of time.

When EverBank today announced this 3-Year Petrol Currency Marketsafe CD today, they produce a page with all sorts of wishy-washy rationale on why customers should be desperate to invest in a vague product involving the Canadian dollar, the Mexican peso, the Russian ruble and the Brazilian real as a way to take advantage of higher oil prices.   Beyond the wishy-washy rationale, the page and the video on the page represent a prima facie violation of the Securities and Exchange Act of 1933.

So, let’s make this simple: 

  • If you believe oil prices are going to go up, you can buy Exxon, Chevron, or another US oil company that produces a dividend. 
  • If you want to take on more risk associated with Canada, Mexico or Brazil, you can buy Canadian oil trusts, Pemex or Petrobras.   
  • If you must own Canadian dollars, Mexican pesos or Brazilian real, you can open an interest bearing foreign currency account with Citibank.
  • If you must own Russian rubles, you should get your head examined.  
  • If you want your money to be tied up with EverBank for the next three years, you should check BestCashCow’s 3-year CD rates and see how EverBank compares with others. 

Under no circumstances should you invest in EverBank's 3-Year Petrol Currency Marketsafe CD.