Friday, January 18, 2013

Safe Money Rate Alert!

Pentagon Federal Credit Union Offering An Attractive Set OF CD Rates

In the present low rate environment, it helps to keep an eye wide open for good deals to offset the generally lousy returns available on safe instruments.  Previous posts have identified the most reasonable places to put "safe" money these days, and one of them is certificates of deposit (CDs).  There is a big range in rates and terms between different depository institutions so it pays to shop around.  At the moment, the institution that appears to be offering the best terms is Pentagon Federal Credit Union (Pen Fed), available at  Pen Fed has a long history of offering above market yields on CDs and is one of the 5 largest credit unions in the US (and anyone can join by purchasing a 1 year membership to the National Military Family Association).  Pen Fed is currently offering CDs with APYs ranging from 1.25% for a 1 year term to 2% for a 7 year term.  These rates are far above what treasuries offer (less than 1% yield for 5 year money) and the 3 year rate is about the same as a 10 year treasuy.  Better yet, if rates spike Pen Fed offers fixed early surrender penalties of 6 months' worth of interest for terms up to 4 years and 12 months of interest for 5 and 7 year terms.  The math says that a 4 year CD yielding 1.85% APY would have an early surrender penalty of less than 1%, effectively granting the buyer of this CD a very cheap put option in the event of a rate spike.

To be clear, 2% and under yields will not blow the doors off for anyone.  However, in a very low rate environment where competing CDs and treasuries offer a fraction of the interest Pen Fed is generously dispensing, this looks like rates worth grabbing.  Be sure to stay below the deposit insurance maximums, or course.

Disclaimer: As always, due your own due diligence.  Although it seems unlikely, you can probably lose money even buying a CD.  Read the fine print and be careful.  I have no affiliation with Pen Fed other than being a customer for a number of years.


  1. I just discovered your blog and have enjoyed reading through the archives. Thanks for sharing your expertise.

    I bought some PenFed and Patelco 5-7 year CDs not long ago when the rates were 2.4% to 2.5%. Now that 2.0% is the best available I've been looking for alternatives places to add to my "high quality, short-term bond" bucket. On Vanguard's site I came across several non-callable brokered CDs maturing in 2011-2012 paying non-compounded 2.7%, roughly equivalent to a compounded 2.44% CD. Of course there is no early surrender option, other than selling on the secondary market for whatever bid is available. Right now I'm looking at the higher yield and wondering just how much that early surrender option is worth.

    Would you (or any of your readers) mind offering an opinion as to whether you would consider these a worthy alternative to the 2% PenFed CD in your own portfolio? Any thoughts would be appreciated. Thank you.

  2. Kevin:

    I am wondering if you perhaps have a typo in your comment? If these brokered CD's matured in 2011-2012, I presume they are no longer available. If these really mature in 2021-2022, then what you are looking at is equivalent to a treasury obligation taxable at the state level (treasury interest is non-taxable by all states) which matures in 8 to 9 years (with no early out option). In the current environment, I would not find that long a maturity on a low-coupon bond particularly attractive. You would not have the early out that a surrenderable CD offers and over a 9 year period we could see interest rates (and possibly inflation) move pretty far up from where they presently rest. I think much better alternatives would be I bonds (although you are limited to $10k per social security number per year), and then the current roster of Pen Fed CDs. The sweet spots in Pen Fed's rate structure are the 4 year and 7 year CDs. The 4 year has the highest yield/longest maturity of the CDs with a 6 months of interest penalty and the 7 year is the most attractive of the CDs with a 1 year of interest penalty.

  3. Yes, that was a typo, and 2021-2022 is correct as you inferred. Thanks for your thoughtful response.