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Callable CD's - Lessons Learned For Some

Vernazza
  |     |   34 posts since 2022

In my situation, I needed and wanted the certainty of income so I purchased all, non-callable, 5 year, 5.05% CD's within IRA accounts. With rates going down, I hear from others where just the premiums alone over face value, collectively on all their CD's, are over $200,000 if they sold, many up over $100,000 plus on premiums alone, but nobody has plans to sell because they want the income for the next 4 years plus on their 5 year CD's.

Hearing from others, they are getting redemption alerts on their callable CD's. JP Morgan and many others are all calling back their callable CD's. Some people seem confused they did not request a payout and did not realize they had callable CD's.

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DannyKyle
  |     |   68 posts since 2022
What exactly and where did you buy that stuff? I want to smoke that too.
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choice1
  |     |   371 posts since 2023
Hate to steal your thunder but in addition to comments above if a FI is “taken over” all rates could be adjusted and/ or CDs cancelled …soooo a stretched FI could still be disappointing
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Rightdx
  |     |   43 posts since 2022
In November of '22, I bought $50,000 of a new issue brokered 5.0% 5 year CD. Today it's worth $51,743. So that is a capital gain (premium) of $1,743. I could sell for a profit, but then I would no longer be collecting 5% on my money. If I had purchased 5M instead of 50K I would have a gain of $174,300. So you must have some rich friends if they are up that much! It takes big bucks to make big bucks.
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DannyKyle
  |     |   68 posts since 2022
Sounds about right. I parked $34k in a 5.05% non callable CD for 4 years about a year ago. Currently It's showing a capital gain of $1,134 if I want to sell. Not to mention the $1,700 interest that I collected so far went right back into ETFs that are showing $340 gain including the dividends (dividend also going right back into ETF purchase), and I will continue to invest the earned interest back into the ETF until this CD matures. Let's see after 3 (1 year already passed by) years where I end-up from $34k to $XXk.
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w00d00w
  |     |   360 posts since 2012
i don't rely on the brokerage's valuation of a brokered CD prior to maturity. seems to me a best educated guess based on recent sales of same or similar, but the brokered CD market isn't as liquid as the Treasury market and the realized sale price of the brokered CD could be much different than what the brokerage estimates. muni market even less liquid, so i'd take any value estimations there with a grain of salt.
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Rightdx
  |     |   43 posts since 2022
Good point. Same is true for agency bonds. I recently purchased a FHLB on the secondary market and was very disappointed in the price I got, due to the wide big ass spread (I mean wide bid-ask spread, lol).
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Rickny
  |     |   1,296 posts since 2017
A Brokered CD is very similar to bonds. The price can go up or down depending on intrest rates. Some are callable and some are not. Vanguard clearly states whether a bond is callable or not. You can sell your CD on the secondary market for gain or a loss. If you hold till maturity or if called you will get par.

Many years ago if a muni bond was called in many cases you would get 101 .vs par (100). They no longer do that.
People need to do research and understand the investments they are making and the rewards, restrictions and risks.
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Rickny
  |     |   1,296 posts since 2017
Rates went up to 5% plus in a short matter of time. The outlook for rates is downward but an also rise again quickly. Laddering is the best strategy to me. Similar to dollar dollar cost averaging. At this point I'm investing in Tax Exempt Munis in both the MTA and NY Municiple Water bonds. Looking at one's that are callable in 3-5 years and paying 4% and are a bit below par. We live in NY and in a high tax bracket . Again, do your research if this is the right investment for your needs.
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NYCDoug
  |     |   335 posts since 2011
Also in NY, but a Muni newbie, I've been feeding matured CD funds into Vanguard's VNYUX, a longish-term Mutual Fund focused on NY Munis, with a somewhat steady tax-free 30-day SEC yield of 3.52% (as of 9/12/24) . . . which equates, for me (a NYC resident) to about 5.34%

https://investor.vanguard.com/investment-products/mutual-funds/profile/vnyux

A key benefit is that my MAGI is lower, for IRMAA bracket purposes, while raking in roughly the same amount of interest I would have been earning — after tax — from a 5.3x% CD
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Rickny
  |     |   1,296 posts since 2017
I prefer single bonds (diversified) as they will pay par until they are called or mature. The NAV can change on a bond fund.

The bond fund is more diversified than the number of bonds I have and is liquid.
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anonlol
  |     |   178 posts since 2016
If you have declining rates and higher cds that you took which were callable you will be called eventually no surprise there. Been there done that.
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