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Buying CDs in the secondary market --especially in an environment of nearly zero interest-rates-- is a really stupid thing to do.

But don’t just take my word for it. Let’s work though some actual examples. TD is offering a mid-range CD, GE Cap’s 2.950’s of ’23, at 100. A commish will have to be paid. That will drop the achieved yield a bit. But let’s ignore that fact for a while. So that price and rate becomes a benchmark. A 10-year CD, from an A1/AA+ rated company, can be bought at a price that would yield roughly 2.95%.

However, some credit unions (such as mine) offer high-yield checking accounts that offer around 2.25% for the first $25k-$30k of deposits, and if you go over to the corporate side of that same issuer and out on the yield-curve a bit, you can pick up another 140 bps. However, screwing around with debt instruments that are explicitly (or implicitly) principal-protected is a sure way to lose exactly what one is trying to protect, namely, purchasing-power.

E.g., if you buy a CD offering 6% (which you won’t be able to find these days) and if your combo Fed/State tax rate on ordinary-income is 25%, you net is a mere 4.5%, from which you still have to subtract your personally-experienced inflation rate, which is probably trending near 6%. Opps. A net 4.5% after taxes, minus a not unrealistic 6% inflation rate, means --in effect-- you are paying someone 1.5% per year to warehouse your currency for you.

That --I’d argue-- is a clear example of financial laziness and stupidity when is it isn’t hard to find investments that offer a real rate of return. E.g., two weeks ago, I put on positions in gold, silver, and ag commodities on which I’m averaging gains of about 30 bps per market day. By contrast, a CD that offers 5% per year (which you won’t find) offers a mere 2 bps per market day. So, that becomes a benchmark for making risk-adjusted comparisons. An instrument with no default-risk, but with serious tax-risk and inflation-risk, offers at best about 2 bps per market day.

But it is very easy to find opportunities that offer 20 to 40 bps per market day that have no greater tax-risk or inflation-risk. For sure, those opportunities come with market-price risk (which amounts to default-risk), but the buyer is being well-compensated. So, choosing to buy CD is to choose to accept some risks, but not others, and to be poorly paid for doing so.

Money is a commodity, no different than wheat, copper, lumber, or orange juice. In today’s market, with the Fed/Treasury cartel running the printing presses 24/7, the price of money is so low that the stuff is almost free. Hence, no one is willing to pay up to buy or borrow it. Hence, interest-rates for debt instrument that carry little credit-risk are low, and they are likely to remain low for an extended period, which is Not a Good Thing, for a whole lot of reasons. But that’s the present-day landscape, and a rational investor looks elsewhere than CDs to park cash.

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