bank rates

Discover Raises CD Rates, But Still Baffles

Discover logoI suppose Discover Bank should be commended.

Last week, it raised its long-term CD rates.

Here are the current and previous rates for Discover’s 5-, 7- and 10-year online CDs:

Discover Bank CD Rates

CD Term Current APY Previous APY
5-year 1.95% 1.65%
7-year 2.05% 1.80%
10-year 2.25% 1.90%

Unfortunately, even with the increase, Discover’s 5-year CD rate remains well below the 2.25% APY posted by the three banks now sitting atop our CD Rates Leaderboard.

And, although we don’t rank 7- and 10-year CDs on the Leaderboard, Discover’s rates for those maturities seem just so-so when compared with 7- and 10-year Constant Maturity Treasury yields, which ended last week at 2.16% and 2.63%, respectively.

For some time, Discover has confounded me by offering higher rates (often, much higher) on long-term, “new issue” brokered CDs than on online, direct CDs.

The recent online CD rate changes have, at least temporarily, eliminated this differential with respect to 5-year CDs. Both the 5-year direct and 5-year brokered CD now have an identical 1.95% yield.

But the disparity continues for 7-year and 10-year CDs.

Currently, Fidelity offers Discover 7-year brokered CDs at a 2.55% yield. The yield for 10-year brokered CDs is 3.20%. Neither is subject to early call by Discover.

Of course, direct CDs can be closed before maturity by the depositor upon payment of a penalty, while brokered CDs can only be liquidated by selling them in the marketplace.

But, to me, the convenience of early withdrawal rights and the risk of selling a CD in the market don’t explain the significant yield difference, particularly since the early withdrawal penalty for the 7- and 10-year online CDs is 24 months’ interest.

Vexed by this question, I sought an answer in the section entitled “How are CD Interest Rates Determined?” on Discover’s website.

I came up empty-handed.

I also submitted the question, in writing, at a recent Fidelity-sponsored “Webinar” on the subject of brokered CDs.

Fidelity didn’t respond.

Rather, its representatives expounded on why brokered CD rates are generally lower than those on direct CDs of the same maturity. (The answer: Banks would rather have direct CDs than brokered CDs, because they – and regulators – consider direct CDs a more stable, reliable funding source.)

Oh, well, just another question with no answer – but, because I’m not really interested in augmenting my Discover CD portfolio, it’s not one I’m going to pursue further right now.

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Comments (1)
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One Existing Comment
  1. Jazzin in the burgh said:
    on April 18th at 10:08 am

    very good questions indeed.

    Discover Bank has left me perplexed as to why their CD rates remain so low over such a long time, while their savings remain competitive with so many others.

    So I have been moving my money elsewhere. Too bad, I liked this bank for such a long time, and now I have no other choice but to do so.

    Shame on you Discover Bank.