Dear Dr. Don,
I have about $5,000 in CDs that mature this year and given today's CD rates, I want to move the money to higher-yielding government bonds. Would you recommend TIPS or Series I savings bonds?
-- Kevin Conundrum
You don't say what your investment horizon is for this investment, but I think you're starting with a faulty premise when you assume that government securities will yield more than CDs.
For convenience's sake, I'm going to focus on five-year maturities because it's a common maturity for the investments you're considering. The savings bonds can also be redeemed after five years with no early redemption penalty.
The table below shows the yields for the different investments:
Yields on CDs and government bonds
|CD||3.25 percent||APY||Annual percentage yield|
|Treasury note||2.46 percent||BEY||Bond equivalent yield|
|TIPS||0.43 percent+inflation percent||BEY + inflation|
|Series I savings bond||0.2 percent+inflation percent||BEY + inflation||1.74 percent BEY for first six months of ownership if purchased May 3-Oct. 31, 2010|
|Series EE savings bond||1.4 percent||APY||3.47 percent if held for 20 years|
Sources: Bankrate for CD yield. Bloomberg for marketable Treasuries, TreasuryDirect for savings bonds.
I'll be the first to tell you I don't know where inflation is heading over the next five years, but it looks like the CD is giving you a reasonable yield versus the inflation-indexed investments over that five-year investment horizon.
Investing in savings bonds gives you the ability to defer taxes on the interest earnings until the bonds are either redeemed or matured. The other investments don't give you that option unless you hold them in a tax-deferred retirement account.
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