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Are CDs a good substitute for US Treasury securities ?

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Are CDs a good substitute for US Treasury securities ?


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This article was posted on August 1, 1998.

While US Treasury securities are easy to buy and commission free through a Treasury Direct account, investors willing to do some leg work can get higher yields from certificates of deposit (CD) with virtually the same US Government guarantee against losing your money. For the past 18 months the highest yielding 5-year CD available has beat a 5-year Treasury note from 37 to 94 basis points according to Kiplinger's Personal Finance magazine.

Kiplinger's data included a nationwide survey of bank CDs with a minimum deposit of $10,000 or less. One point to remember, the data plotted here is for the highest yielding CD in the nation. The yields at your local bank may be less, often less that the yield on a Treasury security of the same maturity.

Do FDIC insured CDs have the same government guarantee as Treasury securities?

Almost. US Treasury securities are backed by the full faith and credit of the US Government with respect to principal and interest, up to any amount. FDIC insurance only covers accounts up to $100,000 and guarantees return of principal only. It does not guarantee interest payments. During the saving and loan crisis of the 1980's many depositers had to accept lower interest rates on their CDs after their bank failed and the new owners refused to continue to pay the high rate of interest promised by the previous owners.

What if I need my money before maturity ?

As most people know, CDs have substantial penalties for early withdrawal. Some full service brokerage firm offer CDs and maintain a market in them so that their customers can buy and sell them prior to maturity. Bid/asked spreads in these markets are typically larger than those found in the Treasury market. While these CDs are sometimes advertised as being "commission free", brokered CDs typicaly offer lower yields than those bought directly from the offering bank. The broker has to get his cut of the transaction somehow.

A new service of the Treasury Direct program allows you to sell a Treasury security held in the account for a $34 commission. Taking advantage of the lower bid/asked spreads in the Treasury markets may make it cheaper to sell a Treasury security before maturity.

Whether you buy CDs or Treasury securities, the best course of action is to create a laddered portfolio to lessen the chance you'll need to sell before maturity.

Where can I get information on yields ?

You can find the highest yielding CDs in the nation at the Bank Rate Monitor web site. Several publications like Kiplinger's Personal Finance and Money magazine also have information on the highest yielding CDs in the nation, but this data is often several weeks old by the time the magazine is on newsstands.


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Copyright 1998 John P. Greaney, All rights reserved.

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