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Ally Bank’s No Penalty CD Rate Arbitrage

If you look at Ally Bank’s current rates [3], there appears to be a discrepancy in the way they’ve structured their rates. I tweeted about this last week [4] and it appears the difference in rates has persisted through a recent rate drop, making it doubly curious. Let me explain what I mean.

As of today (June 22, 2009), here are the current rates of several of their products:

Two things surprise me:

  1. A traditional CD should never have a lower yield than a no-penalty CD of the same maturity. With a no-penalty CD, you have the right to close the CD before the maturity period without penalty. The bank can’t close it. You should be paying, through a discount on the interest rate, for that flexibility. When the no-penalty CD first debuted, its interest rate was a tenth of a percent lower than the traditional CD’s rate.
  2. The no-penalty 9-month CD with a higher yield than the online savings account represents an opportunity. We’re in a period when rates on savings accounts and CDs are dropping. However, should rates ever make a turn and start rising, being locked into a CD might be bad news. However, with a no-penalty CD, I can close at anytime so the risk is minimal! There is no reason why someone should keep their funds in an online savings account when the same exact bank is offering a no-penalty CD option with a higher interest rate.

This morning I transferred all my funds from my Ally Bank online savings account into the 9-month no-penalty CD to get that extra 0.15% APY. If the two accounts weren’t at the same bank, I wouldn’t have done it because the transfer time would’ve cost me interest. However, anytime someone is willing to give me a $2 bill in return for a $1, I take it. 🙂

Is there something I’m missing?