CD ladder or Treasury ladder?
Dear Dr. Don,
Is it better to ladder Treasury securities or CDs? Also if you use a CD ladder or Treasury ladder to protect your assets, what else can you put in your portfolio that is relatively safe and will generate income for protection against inflation?
— Jon Juxtapose
You could ladder Treasury Inflation-Protected Securities, or TIPS, but I’d actually argue against that unless you expect to need the money sooner rather than later. That’s because the longer-term TIPS issues typically offer higher real interest rates than the shorter-term TIPS, as shown in the table below.
|TIPS maturity||Real interest rate|
|5 years||0.36 percent|
|10 years||1.28 percent|
|20 years||1.77 percent|
|30 years||1.8 percent|
The tax impact of holding TIPS in a taxable account is an issue to consider before investing. As the TreasuryDirect Web page on Treasury Inflation-Protected Securities points out, “TIPS owners pay federal income tax on interest payments in the year they are received and on growth in principal in the year that it occurs.”
You can choose Series I savings bonds (also indexed to inflation) in place of TIPS and gain the option to defer income taxes in the interest earnings. But the option comes at a price of lower real yields versus the TIPS.
Choosing between Treasuries and CDs for noninflation-indexed securities is an easy decision in today’s interest rate environment: Choose the CDs, because you can earn a higher yield. In the table below, you can see a comparison between Treasuries and CDs according to Bankrate’s Rate Watch feature. These rates shown were current as I wrote this column.
|Maturity||Treasury yield||CD yield||Difference|
|3 months||0.36 percent||0.9 percent||0.54 percent|
|6 months||0.16 percent||1.25 percent||1.09 percent|
|12 months||0.45 percent||1.55 percent||1.1 percent|
|2 years||0.81 percent||2 percent||1.19 percent|
|3 years||N/A||2.42 percent||N/A|
|5 years||2.08 percent||3.05 percent||0.97 percent|
|10 years||3.25 percent||N/A||N/A|
The annual percentage yield on a CD isn’t an exact comparison to the bond equivalent yield on a Treasury security, but they’re close enough that you don’t need to make an adjustment to make a decision.
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