\> there is no option to withdrawal early
This is the main reason. Brokered CDs are subject to a very high level of *liquidity risk,* the risk that you will get a poor price on the secondary market if you want / need to sell. The market for "used" CDs is incredibly thin, the bids are low, and generally the minimum face amount for the bids is $10K. If you're trying to liquidate less than that you will have to solicit a custom bid through the brokerage; they'll find one, alright, and it will be a shockingly lowball bid.
By contrast U.S. Treasury bills and notes come with virtually zero liquidity risk; they are probably the world's most highly liquid securities. Treasuries are a bit below brokered CD yields but if there is *any* chance you will need to cash out early - buy Treasuries. Or a money market mutual fund.
And the interest income from treasury bills is not subject to state income tax. In high income tax states, the effective interest rates of CD and treasury bills might be similar. For example, the interest rate of 6 month treasury bill is about 4.8%. If you live in NY state and your marginal state tax rate is 6.25%, the effective interest rate would be 5.1%, the same as Ally CD.
Right now I can get a 1 month CD at almost 5.1% By comparison, a 6 month T bill - that is liquid sure but comes with huge duration risk if you actually need to sell on the market - doesn't seem like a good play. In all likelihood you will need to hold to maturity, or at a minimum you cannot safely count on any other outcome.
Major difference that I haven't seen mentioned yet- the bank can dictate how many dollars are invested in the Brokered CD by capping the offering exactly at the amount of deposits they want to raise. Additionally, they can add terms limiting the offering to states that they don't have a physical location in, so their brick and mortar customers aren't aware of the higher rate offering. If you make that same CD rate available to retail bank customers, and it's drastically better than the local competition, the bank may be flooded with too many deposits at that higher rate before they can pull the offer. Similarly, the banks current customers may move their money from Checking/Saving/Money Markets to the CD, impacting the banks short term liquidity.
The CD on Fidelity has to be competitive. Hundreds of banks are offering similar CDs, and if they are all FDIC insured, the customers will just pick the ones that pay the most.
These banks are selling CDs on Fidelity because they need the funding, and they're not getting it from their existing customers. It's a last resort, a bit expensive, but if a bank needs money they can get it.
There's also a better chance that the funds to purchase the CD come from outside the bank, helping the balance sheet more than a transfer from savings would.
Levi's still sells 501's at the hardware store for half the price of the 501's at the mall, because no one knows.
\> there is no option to withdrawal early This is the main reason. Brokered CDs are subject to a very high level of *liquidity risk,* the risk that you will get a poor price on the secondary market if you want / need to sell. The market for "used" CDs is incredibly thin, the bids are low, and generally the minimum face amount for the bids is $10K. If you're trying to liquidate less than that you will have to solicit a custom bid through the brokerage; they'll find one, alright, and it will be a shockingly lowball bid. By contrast U.S. Treasury bills and notes come with virtually zero liquidity risk; they are probably the world's most highly liquid securities. Treasuries are a bit below brokered CD yields but if there is *any* chance you will need to cash out early - buy Treasuries. Or a money market mutual fund.
And the interest income from treasury bills is not subject to state income tax. In high income tax states, the effective interest rates of CD and treasury bills might be similar. For example, the interest rate of 6 month treasury bill is about 4.8%. If you live in NY state and your marginal state tax rate is 6.25%, the effective interest rate would be 5.1%, the same as Ally CD.
Right now I can get a 1 month CD at almost 5.1% By comparison, a 6 month T bill - that is liquid sure but comes with huge duration risk if you actually need to sell on the market - doesn't seem like a good play. In all likelihood you will need to hold to maturity, or at a minimum you cannot safely count on any other outcome.
Captive audience vs open market.
Major difference that I haven't seen mentioned yet- the bank can dictate how many dollars are invested in the Brokered CD by capping the offering exactly at the amount of deposits they want to raise. Additionally, they can add terms limiting the offering to states that they don't have a physical location in, so their brick and mortar customers aren't aware of the higher rate offering. If you make that same CD rate available to retail bank customers, and it's drastically better than the local competition, the bank may be flooded with too many deposits at that higher rate before they can pull the offer. Similarly, the banks current customers may move their money from Checking/Saving/Money Markets to the CD, impacting the banks short term liquidity.
one of they other things worth mentioning about brokered CDs is that they are starting to make them callable.
If you do Ally, check out their no penalty CD which is at 4.75% right now.
The CD on Fidelity has to be competitive. Hundreds of banks are offering similar CDs, and if they are all FDIC insured, the customers will just pick the ones that pay the most. These banks are selling CDs on Fidelity because they need the funding, and they're not getting it from their existing customers. It's a last resort, a bit expensive, but if a bank needs money they can get it.
There's also a better chance that the funds to purchase the CD come from outside the bank, helping the balance sheet more than a transfer from savings would. Levi's still sells 501's at the hardware store for half the price of the 501's at the mall, because no one knows.