I advised readers of BestCashCow.com in April to be especially weary of jumping into CDs with interest rates about to rise.

I still believe interest rates have a lot further to rise. Even though oil and gas and other commodity prices have declined in recent weeks, the Fed remains behind the ball with the Fed funds rate at a target 2.25 to 2.50%. With four more meetings to go before the end of the 2022, I’d bet that the Fed funds rate winds up somewhere between 3.50 and 4% in December, before peaking sometime in February.

Many blog writers who follow our space have noted that the last time that the Fed funds rate was at the current level, just prior to lowering rates on July 31, 2019, savings and money market account rates from the largest, most recognized online banks were yielding a rate within the Fed funds target. They have hypothesized that these banks, like Marcus By Goldman Sachs that now has a savings rate of 1.50%, are either flush with liquidity or are simply hoping that customers won’t recognize that they are no longer offering rates that are consistent with a Fed funds rate above 2%. (BestCashCow has a full page of nationally available savings offers that are now above 2% here).

The reluctance of most major online banks to match the current Fed funds rate is one driver leading folks to look at CDs. Another driver is a growing view that no matter what happens with inflation, the Fed will pivot to lowering rates again in 2023.

If your interest in CDs is driven by the low rates in major banks, you could consider short-term CDs (one year or less) with the expectation that you will be able to lock in a higher rate at maturity. They do offer a premium over savings accounts today and may even after one our two more Fed moves.

If your concern is a Fed pivot, you’d want to look at longer term CDs (three years to five years).

It has also come to my attention that there are brokered CDs being offered that are competitive with online rates. We ordinarily do not recommend brokered CDs – offered through places like ETrade, Fidelity, Vanguard or full service brokers – because they lack the ability for early withdrawal with payment of an early withdrawal fee, they need to be purchased a week or two before they are actually issued (during which time you are not earning interest so your effective rate is lower), and they are ordinarily not rate-competitive with the leading rates.

If you are locking into long-term CDs, you should avoid brokered CDs now more than ever. Three-year, four-year and five-year online CDs will ordinarily provide you with the ability to get out with payment of an early withdrawal fee if you need access to your cash or if interest rates should wind up much higher in one year. However, please read our warning about reliance of early withdrawal fees here.

At the same time, readers of BestCashCow are writing to us asking whether they should buy 6-month brokered CDs at 2.70% or stay in online savings and money accounts with banks that are not responding to the recent Fed funds increases. While my answer to these folks is generally that they should seek out higher earning online or local savings accounts, I also think that as long as they are not impairing their liquidity, there is very little to lose by locking into very short-term brokered CDs right now.

I was recently contacted by a reader about 5-year CD rates. Given that the best rate available at any online bank, local bank or credit union remains not much better than 1%, I have long and strongly admonished that it would not be a good idea to lock in right now.

The reader pointed out that they are staying true to their program that involves rolling over 5-year CDs as they mature.

I am in favor generally of adhering to programs through thick and thin, but this is absolutely not the time to do it. At no time have we experienced such tremendous inflationary pressures against a Federal Reserve that is so intent on holding its benchmark Fed Funds rate artificially low (at zero !!). These circumstances have created bubbles all over the place - in cryptocurrencies, in real property, and in just about any asset. And, even if Jerome Powell stands to be correct that inflation is transitory and that the Fed needs to maintain rates at this level to ensure a smooth recovery from the virus, you should not expect cash rates (savings and CD rates) to hold at these levels for the next 5 years.

In 2005 and 2006, online savings rates were above 4%. Within the last three years, they have been well above 2%. There will be competition for your money again. In fact, even today as banks are supposedly flush with cash, there are plenty of banks offering over 50 basis points in online savings and money market accounts.

To forfeit liquidity and lock in to a 50 basis point premium over savings rates (a doubling) for the moment against such an uncertain future is simply foolhardy, unless you can find a bank or credit union that will agree in writing to waive all early withdrawal penalties.

The bottom line is that inflation probably isn’t transitory and that higher rates are coming, but if you insist on hedging against rates moving lower, then buy a one-year CD.

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.