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CDs: At least they’re not Treasuries

By Dr. Don Taylor ·
Thursday, January 16, 2014
Posted: 4 pm ET

Certificates of deposits and U.S. Treasuries have important differences, but their similarity is, when held to maturity, an investor is guaranteed the face value of the investment, assuming the CD is covered by deposit insurance.

A marketable CD and a U.S. Treasury marketable security will fluctuate in value with changes in interest rates, but the face value will be paid at maturity. A non-marketable CD or non-marketable Treasury security -- think savings bonds -- won't see its price change except for the addition of interest earnings to the value of the investment.

That's why I always like to compare CD yields with Treasury yields. In an earlier post, "Treasuries as a CD substitute," I took the position that CD investors who weren't willing to shop for CD rates nationally should at least look into buying U.S. Treasury securities. That's still true, but in this post I'll take the perspective of CD investors who are willing to shop nationally for rates should avoid short-term Treasury securities.

What triggered the post was the December Consumer Price Index (CPI) release in January show inflation running at a 1.5 percent annual rate. It just really reinforced the idea that savers and investors are losing purchasing power when they don't earn a yield above the inflation rate. Chasing high yields doesn't guarantee that you'll outpace inflation and build purchasing power with your savings, especially with shorter maturities, but it will get you closer to that goal.

The table below shows the yield differentials between Bankrate's highest yielding CDs and the U.S. Treasury constant maturity yield curve. The good news is that the highest yielding five-year CD rate is almost a full percentage point higher than the highest yielding CD rate back in September of 2013.

CD rates vs. Treasury maturities

15-Jan-14 Bankrate highest CD yield* U.S. Treasury yield** Yield Difference
High-yield savings 1.00%
3-month 0.45% 0.04% 0.41%
6-month 1.00% 0.06% 0.94%
1-year 1.10% 0.13% 0.97%
2-year 1.41% 0.41% 1.00%
3-year 2.02% 0.81% 1.21%
5-year 3.04% 1.68% 1.36%

*Annual percentage yields (APYs)

**Source: U.S. Department of the Treasury, daily Treasury yield-curve rates

What do you think? Are you willing to chase yields nationwide or do you need and want the comfort and security of having a branch nearby?

Follow Dr. Don on Twitter @drdonsays.

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