The search for safe income is not very rewarding these days -- both bank rates and bond yields are at or near record lows. That makes it all the more necessary for consumers to scrounge for every point of yield they can find. One trick for choosing between deposit accounts and bonds is knowing that the right answer might vary depending on how long you are willing to lock up your money.
Among deposit accounts, certificates of deposit (CDs) particularly lend themselves to comparison with bonds because they have a designated maturity date. What's striking about the relationship between average CD rates and U.S. government bond yields these days is that at some maturities, CDs offer twice as much interest as bonds, but at other maturities, the relationship is reversed.
Essential differences between CDs and bonds
Before looking at how the numbers stack up these days, it is worth reviewing some of the essential differences between CDs and Treasury bonds:
- Cost of access. CDs are typically very easy to access, with no fees and usually fairly low minimums. Buying Treasuries is likely to involve some trading costs if you do it directly, or management fees if you buy them via a mutual fund.
- Reaction to interest rate changes. The value of Treasury securities moves up and down due to changes in market interest rates, while your CD will not change in value other than with the accumulation of interest. However, if you hold your Treasury securities to maturity, the interim fluctuations won't matter much because you will get the face value of the bond at the maturity date.
- U.S. government guarantee. Both Treasuries and deposit accounts are backed by the U.S. government, but with deposit accounts, the guarantee is limited to $250,000.
- Market inefficiency. On any given day, Treasuries will cost pretty much the same no matter where you buy them, while there are significant differences in CD rates from one bank to another, which makes shopping around worthwhile.
In many cases, one or more of the above may be the deciding factor in choosing between CDs and Treasuries. Otherwise, the decision may come down to a yield comparison.
CD rates vs. bond yields
So which has the advantage -- Treasuries or CDs? It depends very much on the length of time.