bank rates

Long-Term Brokered CDs To Look For

Every week, I browse the websites of online retail brokers Fidelity and Vanguard, and fixed-income wholesaler Incapital LLC, looking for new deals on long-term brokered CDs.

By long term, I mean CDs with maturities of 10 years or more.

I haven’t bought anything yet, but this is a market where big banks sometimes offer rates that can’t be dismissed out of hand.

For example, during the last week of September, Goldman Sachs Bank USA offered a 10-year, noncallable certificate of deposit with a 2.55% coupon, while GE Capital Retail Bank marketed a 10-year CD, also noncallable, with a 2.50% annual rate.

Like most “new issue” brokered CDs, these were priced at par (face value) and commission-free to investors.

Their rates compare favorably with the 10-year CDs offered directly by Discover Bank (2.10% APY) and (ugh) Chase Bank (1.25% APY in California).

For those who absolutely must have a Chase CD, that bank offered an 11 1/2-year brokered CD with a 2% annual rate.

The problem here — as with many long-term brokered CDs — is that this instrument is callable by the bank before maturity. The 2% is only guaranteed until September 2014, after which the CD can be called at par.

(Callable CDs pay a higher interest rate to compensate for the risk that the issuer will redeem the CD early, should interest rates fall. If the CD is called, the principal and accrued interest is paid and the account is closed.)

Earlier in September (before the Fed announced QE-ternity), Wells Fargo was shopping a 3% CD!

Unfortunately, it has a 20-year term and is callable after two years.

Some potentially attractive brokered CDs have a step-rate feature, providing for specified increases in rate during the CD’s term.

Again, toward the end of September, GS Bank was offering a 12-year step-rate CD, with an annual rate of 2% for the first four years, increasing periodically thereafter to 6% in the final year.

That would produce a 3.125% yield-to-maturity.

The no-call feature isn’t particularly generous, however — one year only.

But you have to pick your poison in this market.

A BMO Harris 12-year step-rate CD then being offered carries a 2% initial rate for seven years, but has a yield-to-maturity of only 2.45% and call protection for but six months.

Although these specific offerings have now closed, the CDs may available for purchase in the secondary market. However, you have to be careful there.

Interest rates have continued declining, so buying one of these CDs in that market (where commissions and markups are charged) may require paying a premium over par.

A bank doesn’t owe that premium back at maturity.

And, if the bank fails, neither does the FDIC.

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