Buying CDs from a brokerage

Today, I saw an ad on Schwab advertising 3-month 5.3% APY CDs and had to have a look. I’d never bought acertificate of deposit (CD) through a brokerage before, so I had to read all the fine print on how that worked. I also found an older article on the pros and cons of buying CDs from brokerages.

There were three banks offering a 5.2% coupon rate (5.3% APY) with a minimum deposit of $1000. Here was the logic I went through: the 5.3% yield was better than the rate I was getting in my money market fund (MMF), and each CD was at a separate bank: Washington Mutual, LaSalle, and Discover. Each bank’s CD would be insured up to $100K by the FDIC, another thing my MMF didn’t have, and Schwab made buying the CDs as easy as a few clicks of the mouse. No need to open a separate account at each bank, receive and keep up with different statements in the mail, contact each bank separately before a CD’s maturity, etc. And most importantly, no extra fees for the added convenience.

I’m a sucker for less administration, as long as rates are pretty comparable. I didn’t do much shopping around except to look on bankrate and banxquote, which showed that 5.3% was among the best you could get for a 3-month CD at the present time.

Here’s where I’m curious if I’m right:

From what I gather, the Fed might continue to raise rates, or they might decide to halt for a while at the next meeting. But I haven’t heard any reason why the Fed would lower rates. If the Fed continues to raise rates, then CD yields (of any maturity) should tend to increase. Doesn’t that mean that if the Fed stops raising rates that CD yields are likely to remain where they are? (Would they actually go lower for any reason?) It seemed to make more sense for me to buy a 3-month CD with a good rate that matured on October 12, 2006, right after the next two upcoming Fed meetings, rather than purchase a longer-term CD for only slightly more (0.016% to 0.25% for holding 3 to 21 add’l months).

I haven’t followed CD rates very closely, so I don’t know if my logic was right. If you have, or see a problem with my reasoning, please let me know. It’s the only way I’ll learn :)

It’s been a long time since I bought a CD. So long, in fact, that the last time I recall doing so was in the 1980s, when my mom brought me to the bank with my passbook and we bought a fixed-rate CD with something like a 13% APY. I always loved seeing my passbook updated with a new line. It felt like I was making progress on money I never saw otherwise, because my parents always made me deposit the money I received as gifts from my grandparents into my savings account. (Bit of a pain back then for a kid, but I’m certain it benefited developing my financial discipline as an adult.)

And of course, that was back when tellers were friendly and banking was done face-to-face. Nowadays, there are all sorts of weird, wonderful, and not-so-wonderful financial instruments out there. So many choices, sometimes, that it’s hard to decide what to do.

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