Sexy and Dangerous: Avoid the 3.50% Toronto Dominion Callable Step-Up CD

TD Ameritrade is sending out notices to some of its clients offering a new callable step-up CD offered by Toronto Dominion, its parent.

This new product - which offers an initial 3.50% APY interest rate - is dramatically more sexy than their offerings just a few months ago which we discussed and recommended against here.

After two years, the newly-offered Toronto Dominion CD will pay 4.50% APY for years 3 and 4 and 5%, if it isn’t called away sooner by the issuer. The issuer has the right to call the CD any time after year 1.

BestCashCow has never liked brokered CDs. We recommended that they be avoided when rates where much lower and we basically recommend against them now for the same reason. Since they cannot be broken with the payment of an early withdrawal penalty, they represent a significant risk to anyone who may require earlier liquidity. Since this CD has a maximum maturity of 5 years, should you need to get out of it in the early years, you could take a real bath trying to find liquidity in a market that doesn’t exist (where TD Ameritrade is the only buyer). Should you die before the CD’s maturity, your heirs will likely inherit a fraction of what they would inherit were you to buy a straight 5-year CD.

Moreover, interest rates are presumably still rising and the Fed is likely poised to bring the Fed Funds rate above 3% by the end of 2019. If you must reach for yield, you can get 2.70% on a one-year CD and then have the liquidity in 12 months to find a new product with a higher rate.

But, we’ve just had an election that has left the US in an even worse place than we were immediately after the Russians handed Trump the Presidency 2 years ago. And, that opens up the prospect of falling rates. Should that happen, this product will be called away on the first possible call date in November 2019. While you may have brought in 80 basis points more than you would have made in the 1-year CD that pays 2.70%, you will not have been compensated for the risk that you took.

Sexy? Yes.

But, dangerous as hell.

Your better bet is to look at online one-year CDs.

Editor’s Note: The Toronto Dominion product is listed under CUSIP 89114QER5.