Banks offer CDs at 4.5%, but not to regular customers

Banks are selectively raising interest rates on deposits after the Federal Reserve’s sharp rate hikes this year. Many pay their best rates on so-called traded CDs, which wealthy customers buy through brokerage firms. The offers are helping CDs – deposits locked in for a fixed period – regain popularity after falling out of favor in the low-rate era following the financial crisis.

The percentage of deposits locked to CDs hit an all-time low of 6.3% in the first quarter of 2022, according to data from the Federal Deposit Insurance Corp. The measure reached 6.8% in the second quarter.

Traded CDs account for up to half of the CD market, according to an analysis of federal banking data by consulting firm Curinos.

A range of banks offer traded CDs on brokerage firms’ websites. The products generally have many of the same features as traditional CDs, including minimum deposit amounts and Federal Deposit Insurance support.

There are a few differences. Clients who want to exit a traded CD before the end of the term must sell the product in a secondary market, said Richard Carter, vice president of fixed income at Fidelity. Some also have a feature allowing a bank to choose to return a customer’s money, with interest, before the end of the term, he said.

Leigh Gathright was scanning investment options in her Charles Schwab brokerage account earlier this year when CD rates caught her eye. Ms Gathright, 61, last bought a CD in the 1990s. The rates offered on Schwab were around double those advertised by her local bank.

A retiree who lives in Dallas, Ms Gathright in July invested $10,000 in a nine-month CD yielding 3.9% from Discover Financial Services. Best known for its credit cards, Discover generally offers its customers higher CD rates than other banks, though they’re still lower than the rates it offers through brokerage firms. Customers buying directly from Discover recently could get 3.25% for a 12-month CD.

Ms Gathright has since bought five more CDs and plans to buy even more if rates continue to rise. “I never thought I would buy CDs again,” she said.

Charles Schwab notes an increase in general interest. Traffic to the part of its website where customers buy CDs was up 54% in September from the previous month, a spokesperson said.

Even when rates are low, traded CDs tend to come with higher rates than what banks offer directly to their customers. Now that rates are rising, however, banks are using them to hold onto deposits from high net worth customers, which have been less sticky than regular customers of late, said Adam Stockton, director of Curinos which advises banks on pricing for deposits.

“Three to six months ago, most banks were in the position, ‘We have too many deposits.’ There’s now a more balanced view of “Hey, we don’t want to go crazy, but we’d like to retain deposits and relationships as much as possible,” Stockton said. Banks were inundated with deposits at first. months of the pandemic, largely thanks to government stimulus payments.

On Friday, banks were offering one-year traded CDs on Fidelity and Schwab with a yield of up to 4.5%, and six-month CDs at up to around 4.1%. The national average for a traditional one-year CD was around 1%, according to Bankrate.com.

Some of the larger national banks, which have been slow to raise rates on deposits for regular customers, offer generous terms on traded CDs. Wells Fargo & Co. on Friday offered a rate of 4.35% on a one-year CD through Schwab. It offered individual customers a “special” 13-month CD at a rate of around 2.75%.

The interest differential adds up. A customer buying JPMorgan’s recent offering at Fidelity would earn about $2,500 more on a $100,000 CD than on the similar product purchased directly from the bank.

Local and regional banks are also in competition. Bank of Madison, Georgia’s three-branch community lender, is among the banks offering generous rates on Schwab.

Brian Frank, a financial adviser in Key Biscayne, Fla., said he recently started recommending the product to customers looking for a low-risk place to stash cash. A young couple he works with in September put the money they saved for buying a house in 2024 or later into a one-year CD. Although rates are not keeping up with runaway inflation, they are still attractive, he said.

“That’s something we haven’t seen in over a decade: acceptable returns on FDIC-insured investments,” Frank said.

About Marilyn Perkins

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