When investing, there’s often a trade-off between risk and reward. Safer investments—like bonds, money market funds, and certificates of deposits (CDs)—tend to offer measly returns, at least in comparison to stocks.
Thanks to the Federal Reserve’s series of rate hikes over the past year and a half, these safe investments are currently offering competitive rates. Since the spring of 2022, the Fed has raised the federal funds rate multiple times in an effort to cool inflation, bringing it from near zero to more than 5%.
Now that prices are lower, the Fed is signaling rate cuts later this year. Investors who want to take advantage of stellar interest rates should consider locking in those rates soon, and they can do so with CDs or Treasury bonds, bills, or notes (collectively known as Treasurys).
CDs vs. Treasurys
While CDs and Treasurys are considered safe investments, providing yields that track the federal funds rate, the two have significant differences. Before you invest, you’ll want to consider your investment horizon and the yield you’re looking for.
CDs and Treasurys explained
Typically, banks and credit unions offer traditional CDs and share certificates. (Note: brokered CDs work differently than traditional CDs and can be purchased at a brokerage).
With traditional CDs, you tie up your money for a fixed period in exchange for a fixed interest rate. The duration of a CD can range from a few weeks to years. CDs are more illiquid than Treasurys—you can access your cash before the investment reaches maturity, but it usually costs you.
If you tap into your cash before the CD’s term ends, you’ll pay an early withdrawal penalty, typically worth a few months of interest. Generally, you’ll want to choose a CD that aligns with your investment goals—if you plan to use your money a year from now, opt for a 1-year CD instead of a longer term.
While CDs do come in various term lengths, Treasurys offer a wider range of maturities. They are a type of fixed-income investment and bond. Think of a Treasury as an IOU from the government—you’re giving the federal government money to fund its operations and, in return, you receive interest, either periodically or when the bond reaches maturity.
There are four types of Treasury securities:
- Treasury bills (T-bills): 4, 8, 13, 17, 26, and 52 weeks
- Treasury notes: 2, 3, 5, 7, or 10 years
- Treasury Inflation-Protected Securities (TIPS): 5, 10, or 30 years
- Treasury bonds: 20 or 30 years
T-bills differ a bit from Treasury notes and bonds. When you purchase a T-bill, you buy it at below face value (aka par value) and after it reaches maturity, you receive the full face value. The difference between the face value and the price you pay is the interest.
With Treasury notes and bonds, however, you get regular interest payments—every six months until maturity, you receive a fixed interest rate.
You can buy Treasury securities either through TreasuryDirect or a brokerage account. Treasury securities are more liquid than CDs though.
If you want to tap your money before your bond matures you can sell it on a secondary market, which means you’ll have to give it to a bank or broker to sell. If you purchase a Treasury security through TreasuryDirect you’ll have to hold on to it for at least 45 days before you can sell it.
Remember that when you sell bonds, they’re susceptible to interest rate risk. This occurs when interest rates rise and cause the bond’s price to fall.
For example, if you purchase a bond with a 4% yield and the interest rate rises to 5%, your bond is less appealing to investors, so you may have to sell it for less than you had initially purchased it.
How do rates stack up?
CDs and Treasury securities are enticing consumers with higher rates, at least in comparison to previous years. Currently, a 6-month and 1-year T-bill provides a 5.31% and 4.94% yield, respectively. With a longer 20-year bond, you can score a 4.57% yield.
CD rates have also skyrocketed. Although they offer, on average, a lower yield than Treasurys.
As of January 2024, the national deposit rate for 12-month and 60-month CDs was 1.86% and 1.41%, respectively.
“The 1-year Treasury yield is 4.80%. So why on earth [would] someone have their money sitting in a 1.90% CD when the market rate is 300 basis points higher [on a T-bill],” says Preston Caldwell, the chief United States economist at Morningstar. “It seems like there's some people out there that haven’t been paying attention to their short-term cash and fixed-income holdings. It might pay to make sure you’re earning the market rate right now.”
While Treasurys boast higher rates than CDs, you can still score a generous annual percentage yield (APY) on a CD by shopping around. Typically, online banks offer higher interest rates than brick-and-mortar ones. Some of the best CDs have APYs that top 5%.
The best CD rates of April 2024
Here are a few institutions that offer stellar rates:
- BMO Alto: Up to 5.50%
- First Internet Bank: Up to 5.36%
- MYSB Direct: Up to 5.30%
- TAB Bank: Up to 5.27%
- Quontic Bank: Up to 5.05%
Best CDs by term length
Right now, you can get a higher rate by opting for an investment with a shorter maturity. Typically, investors are rewarded for tying up their money for longer periods of time but, since the yield curve is currently inverted, you’ll get a better interest rate by choosing a shorter duration.
It might be tempting to choose a CD or Treasury with a shorter duration because it has a better rate, but you’ll want to consider reinvestment risk or the possibility that rates fall after your investment reaches maturity, causing you to reinvest your funds at a lower rate.
“I think it’s important to look at a range of fixed-income opportunities. And not just CDs because those rates could go down pretty quickly and likely will over the next couple of years,” says David Rosenstrock, CFP and director of Wharton Wealth Planning. “Once those rates go down, you get reinvestment risk.”
Rosenstrock recommends that people with longer investment horizons (like those planning for retirement) consider bonds with longer durations, which allow you to lock in a solid yield for years to come.
If you’re investing for the long haul (more than 10 years), a Treasury bond could be a sound bet.
CDs vs. Treasurys: taxes and risk
When choosing between a CD and Treasury, you’ll also want to consider other factors—like risk and taxation.
What about taxes?
Although CDs have comparable yields to those offered on Treasurys, you might end up with more cash in your pocket by investing in a Treasury over a CD.
The reason why? The interest you earn on your CDs is subject to both federal and state income tax while only federal income tax applies to interest income from Treasurys—not state or local tax.
By calculating your tax burden on a CD versus a Treasury, you can get an idea of what would be more lucrative for you. For example, if you live in a state with high-income tax, it could be a better option to choose a Treasury with a lower yield over a CD with a higher yield.
How safe are they?
CDs and Treasurys are both safe, relatively riskless investments.
Since CDs are considered deposit accounts, they’re covered by Federal Deposit Insurance Corp. (FDIC) insurance, up to $250,000 per depositor, per bank. You can check if a bank is FDIC-insured on the BankFind Suite website.
Treasurys aren’t banking products, but they’re safe because they’re backed by the U.S. government, which is considered unlikely to default.
The takeaway
When deciding whether to invest in a CD or Treasury, you must consider your risk tolerance, liquidity needs, and investment horizon.
Treasurys are a better choice for those who need more liquidity, have a longer investment horizon, and prefer the tax advantages.
