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CD Vs Treasuries

Mb2020
  |     |   2 posts since 2022

Curious why one would consider brokered CDs over treasuries when they have very similar rates if one is looking at 12-24 month duration and intend to hold to maturity? (It is understood that direct CDs EWP may be beneficial if not going to hold to maturity). Thanks!

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Answers
CuriousDave
  |     |   233 posts since 2018
Until recently brokered CDs were outperforming treasuries in almost every term category. That has changed. Currently it’s only the very short term treasuries that have higher yields, and even then not by much. There are savers out there who prefer brokered CDs because of ease of operation - when the CD matures the broker will do the legwork for no extra cost and find a new CD in a very short time. It’s possible for savers to do there own CD searches on their broker’s site (such as Fidelity, Vanguard and Schwab). There is no delay in moving funds around in-house and no need to search for a suitable intermediary between the FIs that offers free electronic transfers for large amounts. With direct CDs one often needs to cash out from one FI and move the funds to a different FI and not everyone is willing to put in the time and effort for that, even though the direct CD may offer a better rate. That problem is magnified with CDs held in IRA accounts at FIs. As IRA custodians, brokers can do in-house transfers very quickly, but trustee-to-trustee transfers between different FIs for directly owned CDs can take many weeks, losing interest for the saver.
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Mb2020
  |     |   2 posts since 2022
Thank you. Vanguard and likely others seems to offer that same flexibility for treasuries so if the rates are the same or better it seems no real downside to them.
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RichardW
  |     |   810 posts since 2019
Some additional differences between brokered CDs and treasuries include: Brokered CDs typically offer a survivor’s option (death put) and FDIC insurance. Treasuries are exempt from state and local income taxes.
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RZ
  |     |   391 posts since 2017
I moved most of my idle cash to Vanguard’s settlement fund which as of 8/8 is yielding 2.10%. I bought a new issue 6 month T-Bill through them and got a rate of 3.1%. The transaction took only seconds and a couple of mouse clicks. I also have a Treasury Direct account but it is much easier to purchase the T-Bill and the cost is identical by going through Vanguard.
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planxy
  |     |   140 posts since 2013
Always got an internal laugh when clients would ask me if Treasury securities were federally insured......I would tell them about FDIC insuring bank deposits and not Treasury securities and then they would go with the "insured" bank products at a lower return.. I actually helped write the Treasury's FDIC/FSLIC bailout legislation back in the last century.
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Ltssharon
  |     |   471 posts since 2020
Just for more amusement for you, you are implying that treasury notes and bills are every bit as secure as FDIC insured CDs, right?
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planxy
  |     |   140 posts since 2013
When I worked as banking senior resource person for the Congress, always made sure than everyone knew FDIC/FSLIC/NCUA federal "insurance" agencies derived their second-tier financial capacity from the first-tier ultimate United States Treasury. Through backstop lines of credit, which had to be drawn upon and extended to the course of $Billions. Some people actually believed that the less direct safety of overly strained agencies (in the 1980s and 1990s) was somehow more desirable than their underlying source of support, the full faith and credit of the United States of America. FSLIC became hugely insolvent and FDIC followed. Treasury had to be called upon to bail out and reorganize the agencies through a new law crossing my desk to help write in many iterations.
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111
  |     |   672 posts since 2019
The original question was - “Curious why one would consider brokered CDs over treasuries when they have very similar rates if one is looking at 12-24 month duration and intend to hold to maturity?“

One implication of this question is the assumption that, given similar rates, why not buy Treasuries since they have no state/local tax while CDs do? Well, one answer for some is that they are buying these in tax-deferred accounts (IRA, 401K, etc.). When withdrawals are eventually made from these accounts, whether the original investment (Treasury or CD) was state/local tax-free won't matter. All that will matter will be the owner's state of residence at that time, and whether or not that state taxes withdrawals from tax-deferred accounts. Several do not, either because they don't tax any personal income, or they don't tax withdrawals from tax-deferred accounts.
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Avocat
  |     |   7 posts since 2010
When you buy a US Treasury at auction, from Fidelity or Schwab, is there a cost difference from buying from a Treasury Direct Account?
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CuriousDave
  |     |   233 posts since 2018
None, for both. That applies also to Vanguard.
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Avocat
  |     |   7 posts since 2010
Thank you, that has been my experience. I have to work with an account at UBS and the broker insists individuals can only buy treasuries on the secondary market and that includes Fidelity, Schwab,etc. just wanted to make sure my information was correct.
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Ltssharon
  |     |   471 posts since 2020
I think you may be working with a newbie. I very often run into them, and feel like I am providing them a gratis education. Good luck.
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uac2
  |     |   6 posts since 2022
For me the answer is that in spite of slightly higher yields on the Treasuries (right now) their coupons are almost always lower then equivalent CDs. Yes a 3 year 3% Treasury may be yielding 3.4%. But I’d rather have a 3.4% - 3.55% coupon on a non-callable CD at or just below par.
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