How to get an even higher CD rate than you see advertised


You can get higher yields for certificates of deposit if you look outside your bank. Federal Reserve interest rates are rising, and this has the positive side effect of increasing annual percentage yields on a variety of deposit products including CDs. reports that some online banks offer yields of over 5% on CDs for a year. This is a windfall, considering the fact the average APY of a 1-year certificate of deposit was only 1.72% during the week of September 11. US1Y US6M US1Y 1Y mountain U.S. Treasury yields for 1-year and 6-months. He said that a brokered-CD could offer a difference of up to 50 basis points. “The yield is higher because the bank knows that it’s in competition for my attention, versus those of the savers with whom they already have a relationship.” One basis point is equal to one hundredth of a percentage. Brokered CDs vs. Bank Offerings With a bank-issued CD, an investor purchases the instrument directly from the institution. Brokered CDs can be purchased through a brokerage. You have access to many banks and a wide range of CD terms and yields. Vanguard brokered CDs, for example, start at 1 to 3 month and extend beyond 10 years. The rates offered by brokered CDs are often higher than those you would find at your bank. However, this is not always the case. Greg McBride, chief financial analyst for said that the availability of attractive CDs through brokerage does not negate the need to shop around and find the best deal. Federal Deposit Insurance Corp. protects bank and brokered CDs. It covers individual depositors for up to $250,000, per bank, per ownership group. There are many ways that these instruments are different. If you redeem a CD that you purchased directly from the bank, you will lose some interest. McBride explained that when you redeem a broken CD, the CD must be sold in the secondary market, which can pose some risks to the investor. The CD’s value will fluctuate along with interest rates. As yields increase, the price of the CD drops. McBride noted that the market can be illiquid at times, particularly if interest rates are moving against you. You might not get back what you invested. Brokered CDs can also come with transaction fees, which are a fee that the brokerage charges for providing access to a wide range of instruments. Some CDs may have callable features. This means that the bank could buy the CD back before the maturity date. If this happens, you might be exposed to reinvestment risks if interest rates are declining. All of these factors should be considered when searching for the best CD. When used as part of a laddering plan, brokered CDs are especially useful. You can then easily find a variety of maturities to fit your strategy. Laddering is the process of purchasing fixed income assets with varying maturities and then reinvesting at each end. Ethridge is replacing fixed income investments with brokered CDs for some of his clients who live off their portfolio income. He said that ladders of 3, 6, 9 and 12 month CDs are available for clients with a lot of cash who want to keep their money in the bank. “They would rather use the money to do something productive now, while it’s still good.” Michael Bloom, CNBC’s reporter, contributed to this report.