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Financial Health Grades Updated from 2017 Q1 FDIC and NCUA ReportsDo Callable CDs Make Sense in Today’s Rate Environment?
A callable CD allows the bank to redeem the CD at the time of the call option or anytime thereafter. The time period from when the CD is opened to when the call option takes effect is known as the lock period. During the lock period, the bank can’t redeem the CD. Lock periods typically range from three months to two years. A traditional CD does not allow the bank to redeem the CD during the term.
Callable CDs are common for brokered CDs, but they are rare for direct CDs that are sold directly from banks and credit unions. Every now and then I come across an institution offering callable CDs.
Should savers ever consider a callable CD as an alternative to a traditional CD? Many readers have commented over the years that they consider a callable CD to be too favorable for the banks. As one reader commented, it’s a "heads the bank wins; tails I lose" proposition.
The main reason one would choose a callable CD over a traditional CD is for a higher interest rate. The higher the rate premium of the callable CD, the more attractive it becomes.
Another reason to choose a callable CD is the interest rate environment. Callable CDs are most risky when interest rates are falling. In a falling interest rate environment, the CDs will likely be called and the depositor will lose the high rate. However, if rates are flat or are rising, there will be less chance that the CD will be called. If the CD is called in a rising rate environment, the depositor should be able to find another CD with the same or higher rate.
In summary, if interest rates have bottomed, callable CDs can be good deals. Of course, no one knows for sure if interest rates have bottomed.
To be a good deal, a callable CD has to have a higher rate than non-callable CDs. Below are some examples of the rate premiums of callable CDs.
MidFirst Bank which has branches in Oklahoma and Arizona regularly offers competitive callable CDs directly from its branches. Below is a list of its 7-year callable CD rates and its 7-year non-callable CD rate as of 8/19/2013.
- 2.50% APY 7-year Callable CD with a 6-month lock
- 2.40% APY 7-year Callable CD with a 1-year lock
- 2.30% APY 7-year Callable CD with a 2-year lock
- 2.00% APY 7-year CD (not callable)
It’s very common for brokered CDs to be callable. In Fidelity’s brokered CD table, there’s a call-protection column that is used to identify callable CDs. If this column has a “no”, the CD is a callable CD with no call protection. If this column has a “yes”, the CD has call protection and is not callable. To determine the lock period, click on the bank’s name. This takes you to the CD details which includes the call protection field. If there is no call protection, there should be “view schedule” link. Click on this and you can see when the CD can be called.
Below are some examples of new-issue brokered CDs from Fidelity as of 8/19/2013. I’ve included the best rates for callable and non-callable CDs for several terms:
- 3.15% 10-year callable CD (1-year lock) from MB Financial Bank
- 3.05% 10-year non-callable CD from CIT Bank
- 2.55% 7-year callable CD (6-month lock) from Compass Bank
- 2.50% 7-year non-callable CD from GE Capital Bank
As you can see above, the rate premiums for callable brokered CDs are small. However, if you prefer buying a CD directly from a bank, a callable CD can allow you to get a significantly higher rate. At least, that’s the case with MidFirst Bank. The premiums may be smaller at other banks that offer callable CDs.
In today’s interest rate environment, how much of a rate premium would a callable CD need to offer for you to consider it a good deal?
"Callable CDs are most risky when interest rates are falling. In a falling interest rate environment, the CDs will likely be called and the depositor will lose the high rate."
Rates don't have to fall that much for some institutions to "call" those certificates. California Thrift and Loan had some very nice yields on CDs in the early-mid 1990s. Due to my own young inexperience and failure to read all the fine print, I was not aware these were "callable" or even knew what that term meant. Lo and behold, one day the notice that California Thrift was calling my two CDs arrived in the mail.
Multiple lessons learned due to that exposure: Education about deposit products is imperative, read the fine print and know your options.
Note: Santa Barbara based California Thrift and Loan evidently shortly went under after that. That may have had something to do with the CDs being called.
January 23, 1997 | Times Staff and Wire Reports Bay View Capital Corp. said it completed most of a previously announced restructuring of California Thrift & Loan, which it bought in June for about $62 million.
I think similar CD rates had fallen at least 2% lower when they called them, but that was not a requirement. They sneakedly has a provision that they could call them anytime.
This is the place I always think of when I see this topic discussed.
I stay away from such instruments, it is not worth the risk, especially if the broker who took your money is not on solid ground. Your money floats at least a month before they are placed in the pool and after they have matured.
"...do you guys live in Santa Barbara?"
Anonymous - #10, @ Monday, August 19, 2013 - 7:02 PM had it right for the most part:
"Before the internet, there used to be many print newsletters that specialized in finding good nationally available CD rates."
lou, I couldn't afford to live in that wonderful paradise Santa Barbara. At the time I was residing in Silicon Valley, to your North and came across an ad for CDs from California Thrift in the San Jose Mercury News. They had an office in Santa Clara and that's where I opened the accounts, and closed them when they were called.
For those considering callable CD's, you might want to look at callable agency bonds. FHLB, FFCB,FNMA, and FHLMC all issue callable paper. FHLB and FFCB are exempt from state income taxes. Yesterday, FHLB issued a 10 year bond that is callable after 3 months with a coupon of 3.75%. That bond will at least give you some basis to compare to callable CD's. You can google "FHLB OF" and click "debt securities" to see what they are issuing. I would also compare all CDs to current treasury yields. Go to CNBC or Bloomberg websites to find current treasury yields. Treasuries are extremely safe and liquid and exempt from state income taxes. Be careful not to let your broker rip your face off on the markup. Ask the broker what the yield to maturity is at the quoted price and make sure that yield is pretty close to whatever source for current yields you choose.
IMO, I would be biased against callable CDs. They are difficult to properly value, not very liquid, and get taken from you if rates move lower.
I believe I have actually posted this info before, but here you go again:
"The FDIC's insurance regulations include the following rule: "Funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, shall be insured to the same extent as if deposited in the name of the principal(s)." 12 C.F.R. § 330.7(a). In other words, the insurance coverage "passes through" the agent or custodian to the principal. "Pass-through" coverage generally is not available, however, unless the agency or custodial relationship "is expressly disclosed, by way of specific references, in the deposit account records' . . . of the insured depository institution." 12 C.F.R. § 330.5(b)(1)."
Most trusted brokerages only deal with FDIC insured CDs. If you ever question whether an offering is FDIC insured or not, ask your broker for the FDIC# of the underlying bank and look it up.
What is good for the goose should be good for the gander. In other words, I would like for a bank to offer a callable cd that I had the right to call (fees not included). Then when cd rates rise, I would have the option to call it and reinvest in a higher rate cd. The banks would never go for this and this is why I do not get excited about their low ball rate callable cd's.
#13, I thought Israeli bonds bought in the US were US dollar denominated. You shouldn't have lost any money because of exchange rates.
http://www.learnbonds.com/israel-bonds/
cd :O)
I don’t know how callable CDs work nowadays but in 2001 I opened a 5-year 6.50% callable CD directly with Provident Bank (callable after 1 year). Soon after passing the one year mark I received a letter from the bank notifying me that they were exercising the call option and that they were closing my account. I received a check in the mail shortly after for the balance in the account. There were no penalties involved whatsoever.