JP Morgan Chase's Callable Step-Up CD is to be Avoided

JP Morgan Chase's Callable Step-Up CD is to be Avoided

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TD Ameritrade is currently syndicating a 6 year callable step-up CD issued by JP Morgan Chase. The CD represents perhaps the most transparent "heads I win, tails you lose" offering available, and should be avoided.

The JP Morgan Chase CD being syndicated by TD Ameritrade has a maximum maturity of 6 years, paying 1% for the first two years, 2% for the next year, 3% in years 4 and 5, and 5% in year 6.  The note - however attractive it may appear at first glance - is callable anytime after 6 months and therefore should be absolutely avoided.

More likely than not, if interest rates remain low, JP Morgan Chase is going to call the note within the first two years.  If interest rates, however, were to begin to revert to historically normal levels over the next two years, JP Morgan can continue to pay note holders rates which may very well be below market rates at that time into years 3 through 5, calling the CD at any point should it be offer a rate than begins to become close to a normal rate of return.

Since JP Morgan Chase has the call option, the entire proposition is in their favor, and while I have often advocated that investors look at structured notes that involve their effective sale of a call option, those notes always involve the receipt of higher interest rates in the near term in return for the sale of the call (often as high as 10 or 11%).  In this case, JP Morgan is giving depositors a 1% interest rate for the first two years - a rate which is even worse than the best cash rates today!   See and compare the best cash rates here.

To boot, these types of syndicated structured notes are not liquid, and cannot even be redeemed early by paying an interest penalty the way that ordinary CDs can.  Rather, purchasers of these notes who want out early will essentially be relying on TD Ameritrade (or a subsequent broker) to go out and get the market price (i.e., take whatever anyone is willing to pay for the CD).

Even a depositor who wants to bet that rates are not going to rise over the next 5 years and is willing to lock into a rate for that time would be better off buying a 5 year CD.  The current best rate on a 5 year CD is 2.32%.  Exclusive of tax consequences, $100,000 invested in that CD will produce $12,150 over the next five years versus the JP Morgan Chase product which will produce $10,386 if not called earlier.  The 5 year bank CD, unlike the JP Morgan product, can be redeemed early by payment of an interest penalty fee.

A still more logical choice in this current environment in light of the reality that rates are likely to go up at some point over the next two years is to either stay in cash, or to invest in a two year CD.  One of the most interesting 2 year CDs available today is a RampUp Plus CD offered by CIT Bank, currently paying 1.35%.  These CDs offer not only better fixed rates than the JP Morgan Chase callable CDs over the next two years, but enable depositors a one-time rate increase if rates should rise over that period.  (The RampUp products were recently named a Best Bet for 2015 by BestCashCow.com.)

Under any circumstances, there are plenty of good CD options available, even in the current rate environment.  The JP Morgan Chase product currently being syndicated by TD Ameritrade should be avoided. 

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