
Treasuries vs. CDs: Why Treasuries Often Come Out Ahead
Oct 3, 2024
5 min read

When it comes to low-risk, fixed-income investments, U.S. Treasuries and Certificates of Deposit (CDs) are the financial equivalent of plain toast—simple, reliable, and unlikely to cause indigestion. Both are favored by conservative investors, particularly retirees who prefer their portfolios as predictable as the sunrise. Yet, while they share some key similarities, U.S. Treasuries often have more going for them, making them the preferred choice for those who like their investments with a side of pragmatism. Let's delve into these similarities and see why Treasuries typically have the upper hand.
Key Similarities Between Treasuries and CDs
1. Fixed, Predictable Returns
Both Treasuries and CDs offer fixed interest rates, providing a predictable stream of income. When you purchase a CD from a bank or invest in a Treasury security, you lock in an interest rate for a specific period. This predictability is reassuring, but not all Treasuries follow the script. Treasury Inflation-Protected Securities (TIPS), for instance, adjust their returns with inflation, catering to those who suspect that money isn't what it used to be.
2. Principal Protection
Both investment vehicles are considered extremely safe, appealing to risk-averse investors—or anyone who breaks out in hives at the thought of market volatility. CDs are FDIC-insured up to $250,000 per depositor, providing peace of mind. U.S. Treasuries, meanwhile, are backed by the full faith and credit of the U.S. government. Granted, even governments have their moments—debt ceilings and political standoffs can cause a flutter—but an actual default remains unlikely.
3. Interest Rate Risk
Both CDs and Treasuries carry interest rate risk, meaning that if rates rise after you've committed, newer issues might make your investment look like yesterday's news. With Treasuries, this risk is transparent—their prices in the secondary market fluctuate like leaves in the wind. Selling before maturity can result in gains or losses, depending on which way the economic breeze is blowing. CDs keep things under wraps, revealing the risk only if you decide to withdraw early and face penalties. However, some CDs, particularly brokered CDs, can be sold on the secondary market without penalties, though they might still expose you to market risk—because there are no free lunches, especially in finance.
4. Range of Maturities
Both Treasuries and CDs offer a variety of maturities. Treasuries range from the blink-and-you'll-miss-it 4-week bills to the marathon-like 30-year bonds. Similarly, banks offer CDs that last from a few months to several years, catering to most needs. This allows investors to choose investments that align with their timelines and financial goals. Both can be structured into laddering strategies to manage liquidity and interest rate exposure, though Treasuries offer more granularity.
Where Treasuries Win
Despite these similarities, U.S. Treasuries often have advantages over CDs in several important areas, making them the favored choice for those who prefer their investments with fewer strings attached.
1. Superior Liquidity
One of the most significant advantages of Treasuries is their unparalleled liquidity. Treasuries are traded on the secondary market and can be bought or sold at any time. This flexibility lets investors access funds quickly without penalties. Of course, retail investors may encounter transaction costs or bid-ask spreads when trading Treasuries, which can nibble at returns.
CDs, in contrast, are generally held to maturity, and early withdrawals usually result in penalties that can range from several months to a year of forfeited interest—a bit like paying a fee for leaving the theater before the movie ends. While no-penalty CDs are becoming more common and offer some liquidity, they often come with lower interest rates or other limitations, reminding us that compromises are alive and well.
2. Unmatched Creditworthiness
While CDs are FDIC-insured up to $250,000—reassuring unless you're pondering where to park your lottery winnings—U.S. Treasuries have no maximum coverage limit. They're backed by the U.S. government's ability to print currency, making a default highly unlikely.
Investors can increase FDIC insurance coverage on CDs beyond $250,000 by spreading investments across different banks or ownership categories, or by using services like Certificate of Deposit Account Registry Service (CDARS). But managing multiple accounts can feel like juggling—doable but requiring attention and a good sense of balance.
3. Tax Advantages
U.S. Treasuries offer a tax benefit that CDs do not: the interest earned is exempt from state and local taxes. This can enhance the effective yield, especially if you live in a state where taxes are more than a rounding error. In contrast, CD interest is fully taxable at both the federal and state levels, which can make your returns look slimmer than anticipated.
That said, if you reside in a state without income tax or with low tax rates, this advantage might seem less compelling. Additionally, investors seeking tax advantages might consider municipal bonds, which can offer interest that's exempt from federal—and sometimes state and local—taxes, though they come with their own complexities.
4. Market Transparency
Treasuries are marked to market, meaning their current value fluctuates with interest rates and market conditions. While this introduces apparent volatility, it also provides real-time transparency into your investment's value. This transparency allows investors to make informed decisions, rather than flying blind.
CDs, conversely, are not marked to market, leading to a perception of stability that's perhaps more comforting than informative. This "stability" hides the underlying interest rate risk, as early withdrawals typically result in penalties. Moreover, the lack of visible price fluctuation means you might overlook the opportunity cost of holding a lower-yielding CD when market rates have risen—out of sight, out of mind, as they say.
5. Broader Maturity Options
While both CDs and Treasuries offer a variety of terms, Treasuries provide more options, particularly for short-term investments. With Treasury bills available in durations as short as 4 weeks, investors can tailor their portfolios with precision. This flexibility is particularly useful for building a laddered investment strategy that addresses different liquidity needs over time. CDs can also be laddered, but their terms might not be as finely tuned—highlighting that sometimes, having more choices isn't just a luxury; it's a convenience.
When CDs Might Be the Better Choice
Despite Treasuries often leading the pack, CDs can have their moments:
Promotional Rates
Banks occasionally offer promotional rates on CDs that can exceed Treasury yields, especially when they're eager to attract deposits. If you encounter a promotional CD with a higher yield than a comparable Treasury, it might be worth considering—provided you're comfortable locking up your funds for the CD's term. After all, everyone appreciates a good deal when they see one.
Simple, Fixed Income
CDs offer fixed, straightforward returns without requiring you to navigate the bond market's nuances. For investors who prefer a simple, hands-off investment with a fixed end date and no need for liquidity before maturity, CDs can serve as an uncomplicated option—the kind of investment that lets you set it and forget it.
Conclusion
While both U.S. Treasuries and CDs offer fixed returns, principal protection, and a range of maturities, Treasuries typically have the upper hand. Their unmatched liquidity, superior creditworthiness, tax benefits, and market transparency make them a more versatile choice for many investors. However, the decision between Treasuries and CDs can also depend on individual risk profiles, investment goals, and market conditions—because one size rarely fits all.
CDs can hold their own, particularly when banks offer promotional rates, when simplicity is valued, or when FDIC insurance limits meet your needs. Additionally, investors can manage higher amounts by spreading CD investments across multiple banks or using services like CDARS to increase FDIC coverage—though it may require a bit more paperwork.
In short, while CDs can occasionally outshine Treasuries in specific scenarios, U.S. Treasuries are generally the more robust investment option due to their liquidity, credit safety, and favorable tax treatment. Investors should carefully consider their financial situation and goals to decide which investment aligns with their needs—after all, it's your money at work.
The concepts expressed herein represent the views and opinions of Pension Consultants, Inc., and are not intended as legal, tax, or investment advice for any specific individual, account, or plan.
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