ok, T-Bill rates have sunk well below CD rates, for the time being. A friend has a lot of money in a 6 month T-Bill ladder, and wants to see if he can increase yield. CDs would be better, but even if he puts a couple hundred thousand in each CD institution (well over the FDIC limit) he would need a dozen CDs.
any other alternative?
What is the scoop on "brokered CDs"? costs/fees?
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The time and effort to buy the brokered CDs, and thus eliminate that risk (of inconvenience if nothing else) is minimal. The FDIC limits are stated, and while I agree that the government will likely not let banks fail, assuming you'll get back the excess deposits is not what I'd advise. (not to mention the better rates one finds on those CDs. ) JOE
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looking at my online broker, buying a fist full of brokered CDs seems pretty easy, although I do agree with beliavsky. Also, buying a fist full makes a smoother ladder.
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True as far as this goes. I mentioned AAAs simply because that's the yield data readily available; personally, I tend to go after AAs. They are virtually as safe as AAAs. All A-bands of munis (A, AA, AAA) have similar, low default rates.
(I did a quick search on default rates, and came up with this Fed paper showing that for 20 year maturity munis, "default probability" [don't know the scaling] for AAA was 0.557, for AA/A was 0.631, for BBB was 1.211
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The paper seems to suggest that the relatively high yield on munis (typically 85% of treasuries) is due to a lack of liquidity. That's real, and why one ought to buy munis to hold to maturity.
In the muni market, insurance is largely a marketing tool - people are willing to pay up for AAA, even though the default rate is already very low. If anything, I regard the downgrading of insurers as a significant buying opportunity (though you need to estimate what the "natural", uninsured, rating of the bond would be).
Mark Freeland snipped-for-privacy@sbcglobal.net
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That number (0.1%) is the figure I usually quote for A-range munis, but I've never taken a good look at the time scale. Obviously the longer the bond, the greater the cumulative probability of a default somewhere along the line. The point of my cite was simply to offer evidence that all A-range munis have similar default probabilities.
If one wants to look at (annual) default rates instead of default probabilities, we have this CNN/Money article asserting that the default rate of single A munis is historically 0.0084%; BBB's default at a rate 7 times as high (0.06%), or about 1/10 the default rate of AAA corporates. This is why muni insurance is more about marketing than real risk.
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Mark Freeland snipped-for-privacy@sbcglobal.net
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How can one quickly access the status of an issuing bank of a brokered CD? The FDIC website has lots of data on the banks, but isn't there some rating service that summarizes this data? I am not planning on exceeding the FDIC limit of $100k, but would like to avoid any bank that is teetering on the edge, just to keep my life simple
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On Feb 22, 5:25 am, "Gil Faver" service that summarizes this data? I am not planning on exceeding the FDIC
If the bank is publicly traded, you could look at how the stock has done recently. A big drop would raise flags. You could look up the rating of the bank's debt, for example Googling "moody's rating citigroup". I think bank deposits rank higher in the capital structure than traded debt, so the deposits should be a little safer.
Bankrate.com
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has"safe and sound" ratings. I don't know how reliable they are.
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"Gil Faver" rating service that summarizes this data? I am not planning on exceeding
The local rag published these links to check bank safety last week:
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I barely skimmed them and have no opinion as to their value.
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Securities Investment Protection Corporation covers stocks, as I recall. In the event of broker bankruptcy it guarantees you get the securities certificates you held in your account. The FDIC covers bank deposits - not that I'm going to read the fine print, but that covers $100,000 cash (and perhaps cash equivalents). Brokerages carry their own private sector insurance, usually for much larger amounts than
100k, and that kicks in above the FDIC insurance.
Honestly, the thing that kind of bothers me about insurance is that in a domino-effect scenario, where does the moeny come from? We are seeing the effects of that with the so-called "municipal bond insureres" who ALSO insured CDO's marketed by hedge funds.
Apparently, few wish to listen to me on this, and I kind of got bounced off this forum once for trying to defend my position on risk. Ben Graham's "Security Analysis" dedicates about one page to risk. The idea is to analyze whatever you're investing in until you have a thorough understanding of its fundamental soundness - and that's how you eliminate risk. The oh-so-popular notion that risk is positively correlated with reward is no more than a fractured extrapolation of purely untested academic hypothesis, bandied about by those who wish to sound sophisticated. The facts are that return is higher when one reduces risk by careful analysis.
The riskless rate of interest (T-Bills) is only called that because there is nothing safer. But as some have pointed out here in this thread, municipalities have remarkably low default rates. By inquiring about a municipality, its financing, and "times interest covered," one can further reduce the already small "historical risk" of default. As someone similarly pointed out, all CD's are not equal - some banks are less sound than others. (I'm so happy and proud to see the correct idea about analysis and risk talked about!!)
The nature of SIPC and FDIC and supplemental insurance is not to insure the quality of the investments, but the distribution of those investments to the account holders in the event of institutional failure.
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