3% APY for 7 year CDs

[whatchamacallit]

I was surprised to see this high of a rate on 7 year CDs considering that is what the 30 year treasury is currently paying.

https://www.andrewsfcu.org/personal/che ... cates.html


If I am reading the website correctly, it looks like these can be bought within an IRA.

This is really making me consider selling my IRA bonds and buying these. It seems like there is some free lunch to be obtained here considering the 7 year treasury rate of 2.26%.

https://ycharts.com/indicators/7_year_treasury_rate

[dualstow]

Yeah, CD rates are generally higher than treasury rates.
By how much, I don't know. At least one of the Kevins here -- which initial -- buys CDs.

[dualstow]

...but, what are you buying 7-year instruments for? Just curious.
After all, the 30-year bonds are not bought for their yield.

[ochotona]

...but, what are you buying 7-year instruments for? Just curious.
After all, the 30-year bonds are not bought for their yield.

For their potential tax losses?

Get the CDs!

[whatchamacallit]

...but, what are you buying 7-year instruments for? Just curious.
After all, the 30-year bonds are not bought for their yield.

I understand this thought because of the possible capital gains (or loses) but I think I have come to disagree on ignoring the yield.

The truth is that you are locking in the yield that you buy the 30 year bonds at.


Here is how I think of it as free lunch for the retail investor:

Imagine if 7 year treasury bonds were yielding 3% but could buy as if they were yielding 2.26%.

If this was possible, a $1000 bond would instantly be worth 1,047.66.

[dualstow]

I have to admit, it's tempting. I have a 2022 ten year note in my vp paying exactly 2%.
If yields go up, I might have to buy some 5-yr treasury notes or CDs.

[Xan]

Seems like a great vehicle for "deep cash".

It does sound good, but it's locked up for 7 years. Not only is that very deep indeed, but if rates should rise, you don't get to take advantage of that.

[dualstow]

What is the penalty for early withdrawal?

Never mind, found some details here (though 2015) via carl53:

https://www.bogleheads.org/forum/viewtopic.php?t=178121

[sophie]

It does sound good until you take state/local taxes into account. For my situation, this reduces the benefit enough that it isn't worth pursuing.

One nice thing about CD's is that it costs only a few months' interest to get out early, should rates rise. Sort of like a US savings bond. A Treasury will sell below par in that situation, enough to wipe out any potential interest gains.

[dualstow]

sophie: In the boglehead thread linked above, it was IRA only, anyway. Still the case? Probably. OP says IRA CD.

[thisisallen]

7 yr rate is same for regular CD or IRA CD
https://www.depositaccounts.com/banks/a ... html#rates

[dualstow]

7 yr rate is same for regular CD or IRA CD
https://www.depositaccounts.com/banks/a ... html#rates

Nice. Ah, rereading OP I see "making me consider selling IRA CDs and buying these". Whoops.
I guess that was just the boglehead thread that mentioned "for IRA only." (kevinm, March 2016)

[whatchamacallit]

@ dualstow
Thanks for boglehead thread. After reading about 4 week transfer it is probably not worth hassle for me after all.

[dualstow]

No problem, but remember your mileage may vary. Looks like some buyers of the CD were luckier than others, and some have a hunger for yield that pushes through all the red tape.

[sophie]

You're all aware that a CD bought for an IRA is likely to be a brokerage CD, right? And that a brokerage CD has to be sold on the secondary market if you want to cash it in early, so that you are taking on the same interest rate risk with it that would get with any other bond?

The point of the barbell scheme is that the cash half should remain liquid, and with minimal interest rate risk. I would not, in an IRA, take on the interest rate risk of a 7 year bond, unless intermediate bonds were part of my investing strategy (like the Desert portfolio). It doesn't seem worthwhile for a 3% return.

Not sure this is available as a brokerage CD though. It doesn't come up at Fidelity. You'd probably have to open an IRA at the credit union in order to get the CD. Seems like a big hoop to jump through for not a lot of reward. You can get 2.8% 10 year brokerage CDs at Fidelity.

[dualstow]

You're all aware that a CD bought for an IRA is likely to be a brokerage CD, right?

I don't know much about CDs, much less brokerage ones, but if this comes with info about an early withdrawal penalty, it's probably not a brokerage one, right?

Well, I think this offering might have started out as a for-IRA CD (possibly brokerage) once upon a time, and now also exists as a regular one.

[dualstow]

LP with gold, I like it.

Hey, rocking chairs and cats are both eternally underrated.

I would replace the needles and yarn, though. https://youtu.be/LS-ErOKpO4E

[sophie]

Lots of threads about this in times past. Treasuries are absolutely safer. They are what back up CDs, after all, and the FDIC guarantee can really only work for small/limited bank defaults. This is reflected in the higher interest rates of CDs. Ain't no free lunch.

The closest thing to a free lunch is US savings bonds. I Bonds have blown away CDs in recent years. They win in interest rate, safety, and tax advantage. The current I Bond pays 2.76%, but that's state and local tax free, and tax-deferred for 30 years. Yes, rates have been in the toilet for the past year or so, but that's not a big deal over time. If you're in the market for a CD, take a look at those first.

[eufo]

Unless I'm reading things wrong... it looks like the rates are down to 2.2% APY... hope some were able to nab that 3% APY.