On and off from February to May of 2023, US financial markets witnessed something that they ordinarily do not experience. We saw 1-year and 18-month brokered CDs rise to levels that were competitive with 1-year or 18-month online CDs, as some of the nation's largest banks raced to quickly fortify their balance sheets in the wake of the failures of Silicon Valley Bank, Signature Bank and Republic Bank.
For many depositors - especially high net worth depositors with lots of money in brokerage accounts - these products appeared compelling. They could gain competitive yields from banks they recognized and that are not ordinarily rate competitive (Chase, Bank of America, Wells Fargo, Truist, etc.) up to FDIC limits without the need to open online CD accounts all over the place. Concerns over a possible Federal government default from an unwillingness of the part of Congress to raise the debt ceiling made CDs still more attractive and accelerated customer flows from Treasurys into brokered CDs.
Almost a year later brokered CD rates are no longer competitive with online CDs.
Some still like what they perceive to be more liquidity in brokered CDs due to the absence of early withdrawal penalties.
At the same time, many BestCashCow readers who rushed into these brokered CDs that are nearing their maturity are trying to get out of them shortly before maturity (often in order to roll into longer-dated CDs and Treasuries before rates continue to fall).
They are reporting that brokered CDs do not offer the additional liquidity that has been perceived due to the following:
1.The market to dispose of brokered CDs does not exist, or if it does, it is not accessible through the major brokers or through online brokers. Bids that are solicited are so far from the market that huge losses would be incurred if sold.
2. While these products were sold without commission, every broker in the country is going to charge a significant commission upon sale. Even online brokers that may allow you to sell other fixed income products without commissions charge at least 10 basis points on any sale of brokered CDs before maturity.
3. There are also losses if held to maturity. Brokered CDs are often structured so that maturity is on a Friday or over the weekend. Either the broker or the bank is earning interest during this period, but the customer is losing interest. In many cases, customers do not realize that the issue date was several days after their money was withdrawn from their accounts. So, the customer loses days of interest on both the purchase and the sale.
Bottom line: Compare online CD rates on sites like BestCashCow or RatesAndInfo.com and stick with them over brokered CDs. One-year and longer term CDs remain more attractive than comparable US Treasurys, even for depositors in the highest state and local tax brackets.
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