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.