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Selling Brokered CDs Was Easy

roll of cash emerging from broken golden eggAlthough I always invest in CDs intending to stick with them until maturity, sometimes I have to make an early exit.

When the CD involved is a brokered CD, with no early withdrawal rights, that means selling it in the market.

Recently, I sold two brokered CDs – one maturing in April 2017, the other in April 2019 – issued by GE Capital Retail Bank, held in online IRA accounts at Fidelity Investments and Vanguard Brokerage.

I did this to ensure that I could, without exceeding FDIC insurance limits, renew a direct IRA CD maturing at GECRB next month.

(That CD – originally opened at MetLife Bank and assumed by GECRB when it bought MetLife’s deposit business – ceases to be separately insured from my other GECRB deposit accounts after maturity.)

The brokered CD market is generally considered thin and illiquid.

The potential difficulty of selling prior to maturity is regularly cited as a risk by regulators and brokerage firms alike.

Nevertheless, I find that Fidelity and Vanguard have fairly efficient online procedures for selling CDs.

In the case of my GECRB CDs, both brokerages permitted me to request dealer quotes or bids online for the quantity I wanted to sell (in dealer parlance, each $1,000 of principal balance is treated as “1 CD”).

Within an hour, my online account pages displayed the best bid received from dealers in response. They indicated, among other things, the net amount I’d realize if I accepted.

I could then either accept the bid or let it expire by doing nothing.

Sales were executed promptly after acceptance.

Not rocket science, but it accomplished my purpose.

Fidelity charges a commission on brokered CD sales of $1 per CD (with a $250 maximum). Vanguard charges no commission.

The catch, I think, is that, because the market is so thin, the ultimate sales prices were much more favorable to the buyer than if, say, I’d sold Treasurys or Agencies.

In other words, it seems to me the purchasing dealer placed an extra markdown on the price of my brokered CD to compensate for the risk of illiquidity in the market.

That markdown – however quantified – represented a penalty of sorts for the early sale of the CD, similar to the penalty imposed upon early closure of a direct CD.

Anyway, my net proceeds for each CD (principal plus accrued interest) exceeded my original investment, so I can argue I didn’t suffer a loss.

But I think I’ll keep to my hold-to-maturity philosophy for now, selling or closing CDs only when I’m absolutely compelled to.

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