JPMorgan Leads with 5.4% CD Yields, Risks of Early Calls Highlighted

Key Takeaway

• JPMorgan offers a leading 5.4% yield on one-year brokered CDs, with Goldman Sachs and Bank of America also above 5%.
• Brokered CDs can be callable, affecting the interest period; JPMorgan's CD is callable as early as Oct. 30.
• Online institutions like Bread Financial and Popular Direct offer competitive one-year CD rates up to 5.25%.

Brokered CDs Offer Competitive Yields

Certificates of Deposit (CDs) are presenting attractive yields, with major U.S. banks like JPMorgan, Goldman Sachs, Morgan Stanley, and Bank of America offering one-year CDs with annual percentage yields (APY) of at least 5% through brokerage firms such as Fidelity Investments. These brokered CDs, available in various maturities, are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, providing a secure investment option. Richard Carter, vice president of fixed income products and services at Fidelity, highlighted the competitive nature of the brokered CD market, offering investors a wide range of issuer options and potentially higher yields.

Callable Features and Investment Risks

Investors should note that brokered CDs may come with callable features, allowing the issuing bank to terminate the CD before its maturity date. This could affect the expected interest earnings if the CD is called early. For example, JPMorgan's one-year CD with a 5.4% yield can be called as early as October 30. Greg McBride, chief financial analyst at Bankrate.com, emphasized the risk of reinvesting at lower interest rates if a long-term CD gets called early. Additionally, selling a brokered CD before maturity on the secondary market could result in a loss of principal, depending on market rates and transaction fees.

Comparing Brokered and Online Bank CD Rates

While brokered CDs offer convenience and the opportunity to invest in CDs from multiple issuers, they do not necessarily guarantee higher yields compared to top-yielding bank CDs. Online institutions like Ally Financial, Bread Financial, and Marcus by Goldman Sachs are offering one-year CD rates ranging from 4% to 5.25%, which are competitive with brokered CD rates. Investors are encouraged to compare rates and consider their investment timeframe and the FDIC insurance limits when choosing between brokered CDs and direct bank CDs.

FDIC's Scrutiny on Passive Bank Investments

The FDIC is contemplating tighter regulations on large asset managers, such as BlackRock and Vanguard, holding significant stakes in U.S. banks to ensure they remain passive investors. This move, aimed at preventing undue influence over bank operations, has raised concerns in the asset management sector about potential increases in compliance costs and impacts on bank stock liquidity. The proposals, spearheaded by FDIC board members Jonathan McKernan and Martin Gruenberg, seek to end self-certification of passivity and may affect how large index funds invest in the banking sector. The asset management industry and progressive groups have voiced concerns over the implications of these regulatory changes on investment strategies and the broader financial market.

Street Views

• Richard Carter, Fidelity (Neutral on brokered CDs):

  "From our experience, the brokered CD market is more competitive."

• Greg McBride, Bankrate.com (Cautiously Optimistic on brokered CDs):

  "Where it causes a real problem is on a longer-term CD... You think you locked into a five-year CD and 12 or 18 months later it gets called. You get your money back and have to reinvest at a time when interest rates are lower." "What you get depends on what another investor is willing to pay for it... If rates move against you, you can lose big, especially on a longer-term CD."