The newly offered EverBank 5 Year MarketSafe Treasury CD is marketed towards depositors who want to bet on the 10 year rate, currently at 2.30%, rising. The product pays no regular interest for the life of the bond, but then may pay a single interest payment in five years to be determined as the difference between the then-prevailing 10 year Treasury rate and the rate at purchase, times a multiplier of 3.3. According to EverBank’s own examples on its website, if the 10 Year Treasury is trading at 6% in 5 years (over 3.70% above its trading price today), the CD will deliver an absolute return of 11.2%.
The problem here is very clear. Interest rates are likely to go up, but not dramatically. The 10 Year Treasury is unlikely to go to 6% in five years with Chairman Janet Yellin and the entire Fed Board of Governors committed to pursuing Bernanke’s accommodative policy of the last 7 and with very little inflationary pressure. Even the most aggressive commentators don’t see it crossing 5% in the next 5 years, and some see it at about the same level it is at today.
More important, the EverBank 5 Year MarketSafe Treasury CD is an awful investment because, even with the 11.2% return that the purchaser will see only if the 10-year Treasury moves past 6%, it will still underperform the compounded return of the best current 5-year CDs over the life of the CD. With the 10 year Treasury equally likely to trade at 2% - in which case the EverBank product will give you back your principal if you hold to maturity - 5 year CD products represent far superior risk-reward scenarios.
Bottom Line: There are plenty of solid products offered by investment banks to enable the purchaser to bet on rising interest rates. This EverBank product is not one of them. Rather, it is like other EverBank so-called CD products (Emerging market currency CDs and commodity CDs) that not only push the boundaries of what is a CD, but also rely on unsuspecting depositors who do not read the fine print.
See all of the Top 5 Year CD product offerings here.