Those willing to lock up their money in fixed income instruments over long periods are ordinarily compensated in the form of higher yields (unless the interest rate environment is such that there is an inverted yield curve).

CD rates however have been compressed for several years, and most CD purchasers have found little incentive to go out far on the duration curve. Rather the more prudent course of action has been to stay in online savings accounts or lock into shorter duration CDs in order to avoid the risk of rising rates.

Goldman Sachs is currently offering a CD product that not only delivers immediately higher yields (3.25%) but has step-up terms that provide some level of protection if yields were to go higher. The CD, which pays interest semi-annually and is callable on each interest payment day after 2 years, steps up to paying 3.50% if it has not been called by March of 2021, then to 4% in 2024, 5% in 2027, and 7% in 2028.

In general, I like step-up or bump-up products as a hedge against rising interest rates. I particularly like the fact that the current Goldman Sachs offering is an FDIC insured CD, unlike structured notes that can also have similar features but where the purchaser is taking on the credit risk of the issuing bank.

The Goldman CD, however, lacks parity in risk. Goldman is funding itself at a very attractive rate with an option to return purchasers’ money in two years. Depositors, however, are taking on the following risk:

1) The risk of having their money tied up in an illiquid manner for 15 years,

2) The risk of earning 3.50% or less on their cash for the next 10 years and 4% on their cash for the next 13 years, and

3) The call risk of having the CD returned in 2 years if interest rates stay low.

A depositor needs to understand that Goldman Sachs Bank will call the CD in two years in interest rates remain low. However, it is very possible that CD rates could return over the next 6 to 24 months to levels where a 5 year CD is paying 5 to 6%. Were that to happen, you would be earning a rate that is substantially below market and have your money tied up for a significant length of time. Basically, the CD produces a “heads I will, tails you lose” type of outcome.

The opportunity to get a 3.25% yield on an FDIC-insured CD in the current market is very tempting. More prudent depositors will forgo this temptation and look at 2, 3 or 4 year bump-up CD products –such as those offered by CIT Bank and Ally Bank - as being more appropriate for this stage in the interest rate cycle. Those products are listed in the relevant pages of this site and discussed in this article.

A user just posted a comment about very attractive rates at Credit Union West in Arizona. I checked it out and the deals look pretty good. They are offering:

• A 60-month CD that pays 2.90% APY on balances from $10,000 - 49,999 and 2.95% APY on balances $50,000+.
• A 60-month IRA CD that pays 3.15% APY on balances from $10,000 - 49,999 and 3.20% APY on balances $50,000+.
• A checking account that pays 2.51% APY on balances up to $10,000 as long as you meet the minimum transaction requirements. To receive the rate a customer must have at least 15 debit card transactions each monthly billing cycle, be enrolled to receive eStatements, and have at least one direct deposit post and settle each month.

Both the 60 month regular CD rate and the IRA CD rate are amongst the highest rates in the country for that CD term. The 2.51% rewards checking rate is not the highest, but it is still a good competitive offer.

The catch is that you must live in either Maricopa or Yavapai counties or have a relative who is already a member of the credit union. If you don't happen to fulfill either of these criteria, then take a look at some of the credit unions in your area. Or, take a look at Pentagon Federal Credit Union which anyone can join and which is offering a 60-month CD for 3.04% APY.

Credit Union West, headquartered in Glendale, AZ is a medium sized credit union with $508 million in assets. It has 13 branches located around central AZ. On its website, Credit Union West says that is has an agreement to share branches at over 5,000 locations nationwide wherever the Co-Op Shared Branch sign is shown. At these locations you can make deposits, loan payments, transfers, and more. You can view other locations that are available by visiting the Co-Op Shared Branch website.

Thanks to Charlene for bringing this to our attention!

I have written about several debt-side bank issued Structured notes in the past (an overview of structured notes is provided here). Structured Notes can offer investors much higher yields than savings and CD accounts. Some Notes offer yields higher than bonds from equivalent credits and protect against rising interest rates. Therefore I have suggested that investors allocate money to these instruments as part of a diversified portfolio.

In return for higher yields, investors may have to accept risk depending on the Note. This risks can include:

1) credit risk of the issuer,

2) prepayment or call risk,

3) liquidity risk (there is no secondary market foremost of these instruments),

4) and, kill provisions that could result in interest not being paid for long periods (even the life of the bond).

For these reasons, it is especially important when purchasing a Structured Note that the investor is being offered a return commensurate with the risk, that the risk is reasonable, and that the credit is strong. While Barclays Capital is rated A by S&P, their current offering fails in the other respects.

Barclays Capital's current Structured Note offering (CUSIP 06741T4J3) is a 15 year Note which pays 6% in years 1 through 6 and 10% in years 7 through 15. However, if 6 month USD LIBOR trades over 5%, a kill provision in the Note activates, and the Note pays no interest.

As this chart indicates, 6 month LIBOR routinely traded above 5% for the period from 1985 to 2001 and then traded above 5% prior to the 2008 recession.

Barclays is billing the Note as an alternative to a CD that provides a steady stream of income if interest rates fall, or do not rise. It is not a viable CD alternative for two reasons. First, interest rates are rising and in a rising interest rate environment, a 15 year instrument is much more dangerous than a 1 year, 2 year or even 5 year CD. Second, CDs guarantee some return if interest rates do rise and this interest rate does not. In fact, the chart above shows that if we revert to a normalized interest rate environment at any point that this Note is still outstanding and you will likely be earning no interest for a long time.

To boot, this Structured Note is callable by the issuer at any quarterly payment date. Therefore, the Barclays Capital is never taking more than 3 months of interest rate risk, but the purchaser is taking 15 years of interest rate risk. In other words, the purchaser is taking all the risk here and the seller is taking basically none.

I have built a portfolio of Structured Notes for my own account and found many that I like (one that I particularly like was discussed here). This is one that I particularly dislike. It seems that Barclays is going after widows and orphans or at the very least after naïve investors who can no longer remember what a normal interest rate environment is supposed to look like. Others will sleep better by checking out the latest short term CD rates on this site. Caveat emptor!