On my brokerage account on Vanguard I was going through the available bonds and found something called "brokeraged CD's". Bank of America was offering a 2 year at something like 3.95%
For my purpose I was just wanting somewhere to store cash for around that time frame so it works for this purpose. What interested me is Vanguard made it seem like they were tradable? They also had callable and noncallable. Rates were higher than treasury bills so I was wondering if there is more I should look into besides just rates like tax advantages vs bonds/t-bills? Was wondering if it would be wise to sub these in instead of bonds in my retirement plan. As Id never heard of these anything I'm missing?
Brokered CD vs Bonds – Mone than just rates?
byu/Certain_Mall2713 ininvesting
Posted by Certain_Mall2713
3 Comments
They’re basically just bonds, but issued by banks. IIRC, they’re not FDIC insured like normal CDs. But banks are subject to capital requirements which probably makes them as safe or safer than investment grade corporate bonds.
I believe they are just CDs you buy through a broker instead of a bank? The rates seem pretty similar to T-bills. At least on Fidelity I have not found a way to sell them early, although that may be user error.
The callable thing just means the bank can call them back early if they choose to. In exchange you get slightly higher rates compared to non-callable. Profits are taxed as income. T-bills are technically slightly tax advantaged since profits are not subject to state taxes, although the practical significance is questionable since state taxes are much lower compared to federal.
They seem roughly equivalent to holding T-bills overall to me, not sure there is much advantage to be had. I’ve owned a couple but mostly swapped to short term bond funds for better liquidity.
If you are looking for tax advantage, municipal bonds are what you are looking for. They are free from federal tax, but can be taxed by states (unless you happen to live in the state that issued the bond). They pay lower yields however for that reason. Local governments can not print USD however, so there may be more default risk, although practically speaking this does not happen very often.
There really is no advantage except maybe a bit higher rate vs treasuries
Callables will usually have a bit higher rate but you always risk they get called early . They are tradable however there may not be a lot of liquidity to them, meaning if you need your money early want want to sell it, you might have to sell it at a bit of a discount.
I mean 2 year treasuries are about 3.8% , if you are subject to state tax depending on your rate the treasury may be a better option
The biggest draw back is liquidity , you may need to price it at a higher discount to sell early vs a treasury , also the risk of rates dropping , it being called early then you have to re-invest after 6 months at a lower rate (if they are callable)