March 19, 2018: Treasury Bills vs. Brokered CDs

Mar 20, 2018 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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For regular SAA and TAA portfolios, the next re-balance will be on Monday, April 2, 2017. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Treasury Bills vs. Brokered CDs

As many readers know, we believe cash and short term investments play a great deal in one’s personal finance. Traditionally, many experts and investors just simply dismissed them as boring investments. But we have indicated the importance of these short term investments: 

  • Many people have day to day need for cash
  • Many people don’t know or are afraid of investing anything else 
  • Some let cash sit just in a sweeping money market fund that earns low or almost none interests when an investment strategy calls for or goes into cash. See, for example, April 13, 2015: Total Return Bond Funds As Smart Cash. 
  • Unfortunately, they don’t actually know how to or just don’t bother to invest in cash either. 

See more discussion in February 22, 2016: Be Cash Smart or October 2, 2017: The Role of Short Term Bond Funds. 

In general, we recommend the following allocation based on the time you need the capital: 

  • Capital needed in 1-2 years: invest in cash or short term cash equivalent including checking/savings,  money market funds, Treasury Bills (T Bills), CDs
  • Capital needed in 5-7 years but beyond 2 years: invest in intermediate term bond portfolios such as total return bond fund portfolios
  • Capital needed in 10-15 years but beyond 5-7 years: invest in managed risk asset allocation stock portfolios such as an all stock (risk profile 0) Tactical Asset Allocation(TAA) portfolio. 
  • Capital needed beyond 15 years: invest in  Strategic Asset Allocation (SAA) and/or Tactical Asset Allocation(TAA) all stock (risk profile 0) portfolios. 

In  September 25, 2017: Fees In Cash Investments, we mentioned that one can purchase Treasury bills and notes either directly from TreasuryDirect.com or just from your brokers such as Schwab or Merrill Edge. We also briefly mentioned brokered CDs. Since then, many readers have expressed interests in these investments. In this newsletter, we will discuss them in more details. 

Brokered CDs vs. bank own CDs

Based on Investopedia, brokered certificate of deposit is 

A certificate of deposit (CD) that is purchased through a brokerage firm, or from a sales representative other than a bank. The bank is still the initiator of the CD, but has outsourced to firms that strive to locate potential investors. A higher price is generally paid for these types of CDs, as they are in a more competitive market.

So these CDs are resold by a brokerage such as Schwab or Fidelity. They generally offer much higher interests than bank own CDs sold to the bank’s customers. For example, right now, you can purchase a CD mature in one year (with minimum $1,000) that yields 2.15% annually compared with: 

  • Bank of America: 0.05% of a standard CD
  • Wells Fargo: 0.3% of a 9-month special CD to 0.55% of a 19 month special CD (no 12 month special CDs offered initially)
  • Chase: from 0.02 to 0.05% 
Of course, one can always find an online bank that offers highest interest rates and keeps hopping to another one once the old one matures. At the moment, the highest yielding CD rates are the following:

So even the selected best CD accounts are yielding lower than brokered CDs. 

What about risk?

In general, brokered CDs are also FDIC insured up to $250,000 per bank (individual account) or $500,000 for a joint account. Just make sure that all of your accounts in one bank don’t amount to that limit. 

One caveat: depending on the interest rates, you might end up purchasing a brokered CD at a price higher than its par value when interest rates are declining. FDIC only insures up to its par value. So it’s still likely (in a very rare situation) that you can lose some value in a rate declining environment. 

What about liquidity?

You can even sell your CD before it matures through a brokerage. However, you are now subject to the interest rate environment. Similar to a bond, you can lose some money in a rising rate environment (like right now) or even makes more than the original interests in a declining rate environment. 

Brokered CDs vs. T Bills

Treasury bills are offered by US Treasury department. Buying a T Bill or T Note (i.e. those mature less than 10 years) is considered the ‘safest’ investment as US government never defaults. Naturally, this means a T Bill would offer lower yield than a CD with the same maturity as investors would demand higher interest payment from a CD since it’s riskier. However, it’s not always the case, just as the following picture shows: 

The above is the yield/interest comparison for various CDs & bonds that can be bought in Schwab on 3/19/2018. One can see that Treasuries mature before 2 years now have higher yields than CDs with the same maturity. 

This is somewhat unusual (and we are lucky to see such a live example) as CDs should offer higher rates. In fact, just as recent as in last December, we showed a table of such comparison (see December 11, 2017: Cash Return And Interest Rate Update): 

Schwab’s Highest-Yielding CDs by Maturity and compared with T-bills
Maturity 1 Month 3 Months 6 Months Selected 1 Year
Schwab CD APY(%)  1.257 1.407 1.557 1.750
T-Bill APY (%) 1.11 1.26 1.44 1.64

The reason is that currently, interest rates are rising. Furthermore, it’s likely banks and some existing CD holders are reluctant to liquidate/sell their CDs for lower yields. It’s reasonable to assume this can happen is a rapidly rising rate environment: Treasuries (new issues) are auctioned weekly with higher rates while CD sellers are slow/reluctant to adjust the speed of rising. 

To summarize, when you decide to invest in CDs, you should at least double check equivalent T Bills to see whether you are getting a good deal. 

There are other specific details such as CD rates among different brokerages regarding brokered CDs. These topics deserve another closer look. 

Market Overview

In addition to high valuation from both stocks and bonds (twin evils), we now have the third one to worry: an administration that’s volatile and can possibly derail world economy balance through a trade war. Whether such a trade war is good to American economy in the long term is subject to debate, however, in the short term this  definitely can have a negative impact on financial markets. As we have repeatedly pointed out, it’s time to review risk exposure and manage it accordingly. 

For more detailed asset trend scores, please refer to 360° Market Overview. 

Now that the Trump administration has been in the office for more than a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation and the promised infrastructure spending remains to be seen.  On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in. 

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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