Hedging my interest rate risk with an add-on CD
"Desperate times call for desperate measures." (Origin unknown)
"Be prepared." (Boy Scout motto)
These were my thoughts when I recently opened a 0.75% APY, 2-year online certificate of deposit at Maine-based Androscoggin Bank (www.androscogginbank.com).
You’re probably thinking: He’s mistaking desperation for insanity, preparedness for ineptitude.
Hear me out.
My new CD -- which, yes, pays more than half a percentage point less than the top nationally available 2-year certificate -- is an add-on CD that allows me to deposit further sums, in increments of at least $100, at any time up to seven days before maturity.
And I opened it with a deposit of only $500.
I’ve previously written about the add-on CDs offered by Androscoggin. They provide a way of hedging against future rate declines, at little cost.
First, I fully expect, as long as Ben Bernanke is Fed chairman and the economy continues to falter, that rates will keep right on tumbling. It’s baked into the financial cake.
A year from now, when I have a bunch of certificates maturing at other banks, a rate of 0.75% APY or less may very well appear on interest rate "leaderboards" as the top 12-month rate available.
It’s not so unthinkable when you consider that a recent Bankrate.com site average for 1-year CDs was 0.83%, and its national average was 0.38%.
So, about this time next year, a 0.75% certificate with a 12-month remaining maturity may be a viable -- even a decent -- vehicle for investing funds.
Second, my Androscoggin investment costs me virtually nothing to maintain.
Over its term, I’ll earn approximately $7.50 in interest. Had I put my $500 into a 1.31% APY, 2-year offering at Ascencia (www.ascenciabank.com), I’d get about $13.10.
The $5.60 "spread" represents pretty cheap insurance.
Plus, I’ve given my token Androscoggin certificate a brand-new payable-on-death beneficiary. That will get me $249,500 of extra FDIC insurance coverage on two existing Androscoggin add-on accounts that have different POD beneficiaries.
These current certificates, by the way, boast a 2.00% APY. I can use them as a receptacle for maturing money until right before they come due, in May and June of next year.
Not such a bad deal, after all.
Well, maybe not.
The truth is that I hope I’m wrong about the direction of rates and that I never have to deposit additional money into my new certificate. It’s there just for peace of mind.
Which brings up another thought, attributable to Thomas Paine: "These are the times that try men’s souls."