I’ve written about Structured Notes previously. Most of what is being marketed as Structured Notes, especially those products tied to individual equities or equity indices, should be avoided unequivocally. Yet, I occasionally come across a product that could make sense for those seeking much higher yields than CDs offer on a small percentage of their cash, with only very negligible risk. The Citibank note currently in syndication under 1730T0R50 / US1730T0R502 seems to fit the bill.

This Citibank Note has a 20 year maturity. Even though it is callable earlier, it should not be considered for anything other than a very small amount of money that you do not reasonably anticipate needing in the short or even intermediate term. It returns 10% interest over the first year in quarterly installments. In years 2 through 19, it pays the difference between the 30 year Constant Maturity Swap (CMS) less the 5 year CMS, less 25 basis points, times a multiplier of 9. The CMS rates are observed and payment is determined every three months, at which point the Note pays an quarterly payment which cannot be greater than 2.5% of the principal amount (or 10% a year). (CMS basically tracks LIBOR which basically tracks 10 year US Treasuries at these maturities; you can learn more here).

The Note goes out over 20 years and anything can happen over that period, including a default by Citibank which is the only risk to principal here. The more likely concerns are (1) that we hit a period of hyperinflation where the savings rate goes well above 10%, or whatever the Notes are paying, at some point during much of the next 20 years, and/or (2) that the yield curve becomes very narrow. If there is less than 1.365% of premium of the 30 year CMS over the 5 year CMS, the Note will return less than 10% annually, and for any period during which it is less than 0.25%, it will pay nothing.

However, I believe that any hyperinflation would be short-lived and that there will always be an inherent time premium to the 30 year over the 5 year. I also believe, from looking at the graph below which reflects on the last 7 years and includes both a recession and a recovery, and that that premium is likely to remain wider than 1.365%. Therefore, in my estimation this Note is likely to deliver a 10% annual return for much, if not most, of the next 20 years or until called, and 10% is not a bad return annually.

Author's Note: The author recommends nothing greater than a very small position in these or any debt-side Structured Notes. Most individuals will find current five year CDs to be more appropriate intermediate and long terms stores of cash.

Editor’s Note: We are often contacted at BestCashCow with queries about how to purchase these Notes. Please note that they are available though a broker that is part of the Citibank syndicate, and not through an ordinary Citibank branch.

Seniors, like all other Americans, seek the safety of FDIC insurance and higher returns on their cash when depositing money in an online bank. However, those in their third age are particularly sensitive to the following ten factors:

1. Website Clarity – the website should be clean and absent of clutter from the moment the user signs on and thereafter.
2. Website Ease of Setting up Account – It should be easy to set up an account, including the ability to easily create passwords and password hints. The user should not be put through contortions here.
3. Availability by phone of US-based customer service personnel skilled at directing newcomers through the website
4. Brand Recognition and Comfort
5. Ease of Use and Access to Account on a regular basis – seniors need to know that they have arrived at the landing for accessing their savings and CD accounts, and the website shouldn’t share an interface for accessing information about car loans, student loans or home loans
6. Clear Disclosure of Savings and CD rates at all times (seniors do not want to be vulnerable to bait and switch; they want to know their rate at all times)
7. Ease of setting up and directing ACH transfers to savings and checking accounts at other institutions.
8. Quick execution of ACH or wire transfers
9. Absence of all limitation (e.g. d low volume and dollar limits) on ACH and other transfers
10. Absence of account service and maintenance fees or other hidden fees

On each of the above ten factors, BestCashCow has ranked the following as the three best online banks:

Personal Savings by American Express

American Express’s Personal Savings product offers outstanding online and phone service from a name that is well recognized and trusted. The bank ranks excellent on each of the above factors, but excels particularly in all aspects involving phone support. Plus, with no minimum opening balances or minimum maintenance requirements, Personal Savings by American Express is a clear winner for folks in their third age in 2014. One clear downside of Personal Savings by American Express, however, is that their rate is currently slightly below that of their competitors and their CD rates are not competitive.

GE Capital Bank

GE Capital Bank benefits from the solid GE and GE Capital brands. It also provides no minimums, no transaction fees and multiple ways to access capital easily and quickly. Customer service that is available during normal business hours and responsive immediately to online requests makes GE Capital Bank an online bank where seniors should feel comfortable stashing cash.

CIT Bank

While perhaps less well known than others on this list, CIT Bank offers a high quality online savings account with virtually no fees to open, maintain or operate as long as a $100 minimum balance is maintained. Those maintaining $25,000 or more in an account with CIT Bank also receive a slightly higher rate and a waiver of outgoing wire transfer fees (ordinarily only $10). With both outstanding service and great rates make CIT Bank an excellent choice for seniors.

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An account with each of the above three online banks provides someone in their third age with the ability to comfortably and safely deposit, fully insured by FDIC, up to $750,000 ($1,500,000 if a couple) and to earn much more on this money than he or she can through any other absolutely safe, no risk investment (6.5x to 8x what is earned at brick and mortar banks). In short, these three banks are safe for anyone and worth looking at, but especially worthy of a look for seniors who have until now been uncomfortable with online banking.

NOTE: BestCashCow undertook this survey and analysis totally independently of the banks studied, including the above three winners.

For the sake of disclosure, CIT and GE Capital Bank are advertisers on BestCashCow. They did not directly sponsor this article or the study behind it.

Compare all online savings rates here.

I am a big proponent of keeping money that you absolutely cannot afford to lose in savings and CD accounts and BestCashCow.com is the best place to find and identify the appropriate online and local accounts for your needs. It makes sense in the current interest rate environment for investors to look carefully at placing very small amounts of their cash that they want to be sure is secure, but do not need to access for a long period in bank-issued Structured Notes in order to avail themselves of the opportunity to earn higher rates over time. While we have seen such Notes in the past offered by the likes of Morgan Stanley, Citibank, Chase, Goldman and HSBC, the offerings currently in syndication are offered by Barclays Bank PLC, the British bank rated A-/A3, and Natixis, the French bank rated A/A2.

The Note currently in syndication by Barclays Bank PLC is a 15 year Note paying 10% for the first year and then as much as 10% in subsequent years (on quarterly payment dates) based on the difference between the 30 year less the 5 year Constant Maturity Swap (CMS) rate. The Note is the same structure as an HSBC Note that I wrote about here and to a Citibank Note discussed here. Unlike those notes, this one is using a multiplier of 5 that offers a higher likelihood of getting closer to 10% (the 30 year CMS needs to stay only 2% above the 5 year on quarterly measurement dates for payment to 10%). The Note is callable after the first year and on each quarterly payment date, which is a feature that is unattractive, but does not jeopardize the 10% that this Note produces during the first year. Those interested in this Note can learn more about it by referencing CUSIP 06741UBK9 or ISIN No. US06741UBK97.

A Natixis Note in syndication is a 20 year Note that pays 11% for the first year and then as much as 11% in subsequent years (on quarterly payment dates) based on the difference between the 30 year less the 2 year CMS rate (the multiplier is 4). The Note does not pay on quarterly measurement dates if the S&P 500 trades more than 25% below its price on closing, and is not callable. This Note is similar in structure to a JP Morgan Chase Note that I wrote about last Fall. The main difference from the JP Morgan Note is that it is 20 years, instead of 15. Those interested in this Note can learn more about it by referencing CUSIP 63873HKC7or ISIN No. US63873HKC78

The Natixis Note is more interesting than the Barclays Note for several reasons – it is not callable, is based on the 30-2 spread instead of the 30-5 spread, may pay a higher interest rate (has a higher cap), and is issued by a credit that is currently rated to be slightly stronger. Nonetheless, I have had a tough time getting my hands around this one for two reasons. First, while 15 years is already certainly pressing the length of time for which anyone should lock up their money in an illiquid investment, 20 years is just much too long. Second, I find the S&P contingency something that is different to stomach, especially as the S&P could easily fall more than 25% and stay down there for a lengthy period of time. I therefore personally bought a small stake in the Barclays Note, but avoided the Natixis one.

Structured Notes are interesting ways to pick up yield, but investors should always take a very measured approach. Both of these Notes are illiquid and involve real interest rate risk, and could very well wind up paying little or no interest for lengthy periods of time.