CFR - Pay Attention: Brokered Bank CD Rates 12 18 24 Month Yield 5.25%

2023-03-09 15:31:37 ET

Summary

• I monitor bank CD rates like a hawk for three reasons.
• In the immediate aftermath of Fed Chairman Powell's visit to the Hill this past Monday and Tuesday, CD rates popped in line with Treasury rates.
• My favorite source for brokered CDs currently has 109 risk-free CDs available, of which 52 yield greater than 5%.
• I have been moving money into brokered CDs for the past six months and will accelerate doing so now that I can get a risk-free 5.25% yield on 12, 18, and 24-month money.
• This article closes with a discussion of my recent bank trades as a follow-up to articles I have posted during the past six months.

Why I Monitor Brokered CD Rates

I watch CD rates like a hawk.

CD rates give me insight to:

1. Safest investments to park money during a storm.
2. Bank liquidity big picture.
3. Future bank earnings indicator.

109 Brokered CDs Available March 9, 2023

My favorite source for brokered CD rates today has 109 different Brokered CDs available in which I can park money. About ten days ago, there were less than 50 Brokered CDs available.

As of March 9, 2023, almost half the Brokered CDs available at my source for Brokered CDs yield greater than 5%.

• Thirteen of the Brokered CDs today have a 5.25% APY.
• Five of those pay interest monthly, five semi-annually, and three at maturity.
• Four of the 5.25% APY CDs mature in one year, four in 18 months, and five in two years.

Short-term maturities look attractive:

• 3-month CDs with an APY of 4.84%.
• 6-month CDs with an APY of 4.94%.
• 9-month CDs with an APY of 4.96%.

All of the aforementioned CDs are non-callable. If I am open to Callable Brokered CDs:

• 1-year CD callable in 3 months has an APY of 5.50%.
• An 11-month CD callable in 3 months has an APY of 5.35.

Implications

There are four implications, in my view, to the current CD rate environment:

1. Brokered CDs yielding ~5% is a compelling risk-free return at a time of significant uncertainty. I will continue to move money into CDs with maturities between 3 and 24 months.
2. The big pop in CD rates is raising liquidity concerns for the banks. There is clearly a scramble to raise cash for some banks.
3. I expect we will hear from more than a few CEOs in April that the record pace of interest rate increases is beginning to eat (even more) materially into Net Interest Margin. I would not be surprised if we begin to see banks issuing earnings warnings this month.
4. If US banks are confronted with high (5%+) CD rates for an extended time (more than a year), US bank regulators will begin weighing solvency risk for banks that have balance sheets that look a lot like the balance sheets of S&Ls in the second half of the 1970s/early 1980s. Fortunately, not one big or mid-size bank fits this description. US banks as a group manage interest rate risk competently.

My Action Plan

I like risk-free CDs right now. I have been a buyer as I have de-risked my equity exposure. I am keeping maturities to a maximum of two years.

My bank investment portfolio has never included banks that are long on fixed or semi-fixed rate assets (i.e., duration risk ) and short on cheap core deposits. I call these "Have Not" banks.

To the contrary, I have always preferred "Have" banks with cheap core deposits, low loan-to-deposit ratios, and assets that benefit from rising interest rates.

My September 2022 article about "Have" banks provides more background on my thinking.

For those of you who are regular readers of my banking articles, including updates I provide in the Comments section periodically, you know that I have this year:

• Sold 2/3rds of my holdings in First Interstate BancSystem, Inc. ( FIBK ) at the end of February in light of meaningful insider sales during the month. This action follows my FIBK article on January 23, 2023.
• Gotten just plain lucky on the Columbia Banking System, Inc. ( COLB ) - Umpqua merger when I bought Umpqua and Columbia shares just before rich dividends were paid and then quickly sold the shares at a decent profit when share prices jumped inexplicably by 10%. Today, Columbia is selling at $27.36. That's not a bad price for long-term accumulation, in my view. Investors interested in Columbia, and there are good reasons to follow this bank, may want to read not only my January 23 article but also the one I wrote about Columbia-Umpqua in October 2021 .
• I have not mentioned this trade in any of my article comments, but I sold about 20% of my Pathward Financial, Inc. ( CASH ) position in early February after I saw insiders sell a few shares. Their sale and mine were at $51+; CASH is at $49.60. As I noted in my November 2022 article on CASH (a must-read for any serious investor), I will continue to accumulate CASH shares on weakness in the mid-$40s. I continue to believe CASH is the ultimate "Have" bank.
• In late January/early February, I began making small purchases of a Cullen/Frost Bankers, Inc. ( CFR ) preferred (CFR.PRB). The CFR preferred is thinly traded, so small purchases are the only kind available, based on my experience. My average cost is $20 a share; currently at $18.51. For reasons I will not get into for this article, I consider CFR to be one of the safest banks in the country. The preferred is today yielding 6%, so I intend to nibble on a few more shares as soon as today. I liken this holding to an annuity since I hold the shares in non-taxable accounts. I have owned the CFR common for nearly a decade in my long-term Buy-and-Hold Bank Portfolio.
• Here's a brief follow-up to my January 17 article about First Republic Bank ( FRC ). It remains a core holding in my long-term Buy-and-Hold Bank Portfolio. The article indicated that I would be a buyer of the common at <$120 and the preferred when yields reached 6%. Since writing the article, FRC shares have been on a roller-coaster, popping crazily to $142 and then proceeding to fall over the past month to now $115. FRC common shares are on my radar, but my sense is that bank stocks as a sector are about to lapse into one of those cycles when investors are loathe to own them. Better buying days may be ahead, but so too, may be some pain for banks as the economy shakes and rattles. I will wait this one out before making any further buys. On the other hand, the FRC preferred ( FRC.PI ) is now on my potential buy list given a 6.05% yield. As long as inflation is not permanent (fingers crossed), preferred shares offered by the best U.S. banks look compelling to me.
• Finally, my September article about Bank of America Corporation ( BAC ) generated a fair amount of investor interest. I continue to like the article and the bank. That said, I noted in the article my intention to buy BAC common shares on weakness. Since the article was posted, BAC shares did not reach my target price to accumulate. I did buy, however, a BAC preferred ( BAC.PL ) since it fell below my accumulation price target of $1200. The current yield is 6.10% at today's price of $1188. Holding.

Final Thought

I sure like 5%+ CDs rates today.

Caveat

The foregoing is my opinion. I share my investment thoughts for the purpose of getting feedback and questions that challenge my ideas and assumptions.

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