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  4. Treasuries Vs CD's - Tell Me If I'm Wrong

Treasuries Vs CD's - Tell Me If I'm Wrong

Over6T
  |     |   31 posts since 2012

As a very long time purchaser of CD's (at 5 different institutions), in the recent year I've become more attracted to US Treasuries. Here are the reasons:

- Treasury yields are often equal to, or better than, CD's, particularly when accounting for the state tax exclusion. Yes, there are certain institutions where CD's have higher yields than Treasuries... but, that takes me to my second reason:

- Opening additional accounts at even more institutions to simply chase high yields is a daunting administrative task, particularly when considering all the variations in term and conditions and related paperwork. Plus, when questions arise, having to talk (or attempting to talk) to CSR's is often very frustrating.

- In my non-analytical judgement the "cost" of a CD's EWP, is no greater risk than the variation in future bond prices- and is equal if either are held to maturity. And, it seems to me that it is more likely today that we will experience a drop in future Treasury yields, thus increasing the bond value - AND I COULD CERTAINLY BE WRONG ABOUT THAT!

- Buying or selling a Treasury is much simpler and direct - what you see is what you get. There are none of the hidden terms or traps that CD's often have (variable EWPs, Bump rates / deposits, deposit caps, etc.).

- And as far as default risk, I'll suggest that Treasuries are less risky than CD's since it would take a US financial default to lose your money (and, yes, that is a risk). On the other hand a CD is subject to the (often fuzzy) financial strength of a Bank or CU in addition to the US Treasury default risk.

To sum up, as I've gotten longer in the tooth, I'm striving in all aspects of my life to keep things simpler and, today, Treasuries seem to help with that.

So, tell me where I'm wrong in my thinking.

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7


Answers
txFish1
  |     |   476 posts since 2023
All of your points are valid. I will say one plus of CD's is you can have the interest paid out every month if you are in retirement and need the income. I am 100% with you on keeping things simpler. I found 3-4 Credit Unions years ago that just about always have top tier CD rates and have stuck with them even if I give up a little interest. Chasing yields for 10 to 20 basis points of interest is not worth it to me for all of the time and effort of opening new accounts and sending money all over the country opening yourself up to fraud, theft and scams but I know people do it and more power to them if it works for them. I have purchased quite a few Treasury bills in the last year as rates have been really good on them and the simplicity and liquidity of buying them in my Brokerage account has made me think of adding more of them in the future.
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Bob42
  |     |   25 posts since 2019
What about the existence of survivor options that permit a brokered CD account survivor to receive par in the event that interest rates have risen and the value of the instrument has declined - assuming the survivor chooses to dispose of the instrument rather than retain it in kind. Don’t believe there is a counterpart in the case of Treasuries
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retiredprof
  |     |   13 posts since 2022
I agree with your points above. However, I do find a 6% yield on 11-14 month CDs enticing, as I reside in a state without income taxation.
I advise friends residing in California to consider Treasuries over CDs due to state income taxes.
Brokered CDs also simplify transactions and record keeping, but in a state with income taxation, there are clear benefits to Treasuries. Nice post, Over6T !
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w00d00w
  |     |   360 posts since 2012
i think my days of chasing direct CD yields are over. the big brokerages offer one stop investing of "safe" money in Treasury bills/bonds, brokered CDs, and money market funds. it's appealing to me at this point to keep all those sorts of investments under one roof.
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LongTimeDAFan
  |     |   69 posts since 2022
I'm with you, 6T, on treasuries vs CDs right now. We've spent the past 15 years chasing rates all over the country, had a few go belly-up and had to find new homes for those monies, and had umpteen accounts to balance monthly, all paying on different days of the month. This past year, we've gone with treasuries, and my life has been simplified. Boy, I sure miss having to balance all of those accounts - NOT! The only downside I've had is trying to budget for 6 months between interest payments, but I've worked that out a bit by buying some add'l bonds that pay out in between and by keeping the funds I need liquid staggered in TBills. And I don't mind paying less state income tax. Our state doesn't charge a high income tax, but we are looking to move somewhere else, and it's a plus not to have to worry about paying state income tax wherever we end up. I mean, we could move to California if we wanted to - ha, ha.
Yes, there is the downside risk of having to sell our bonds before maturity at a lower price, but we plan to hold to maturity and use these bonds as our guaranteed income. Our bank and/or CU interest was never guaranteed. Yes, there's the risk of the US Treasury not paying its debts back, but if that were to happen, then the shit has really hit the fan and our money wouldn't be worth more than toilet paper anyway. So I'm in agreement with you on treasuries.
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IGR
  |     |   580 posts since 2020
"a Treasury is much simpler" that's definitely new.
To sum up, what are "Treasuries" that "seem to help with that"?
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Over6T
  |     |   31 posts since 2012
That's a fair question since the details of how a Treasury yield is calculated (particularly on the secondary market) is indeed more complicated than the simple APY yield of a CD purchased directly from a Bank or CU. However, for me, the complications associated with a CD arise mostly in the process of adding more institutions to reach for yield and then suffer the administration (terms and paperwork) of those added accounts. I am also concerned about continuing to add more accounts and paperwork that one day my heirs must deal with. Certainly, once an account is established with a bank or CU, purchasing a CD is not hard at all.
Alternatively, brokers like Schwab or Fidelity offer a simple method of shopping for Treasuries with desired yields and maturity schedules to fit a laddering preference - much more flexible than what banks and CU's offer. Consolidation of these fixed income investments under "one roof" may not work for everyone. But, so far this year, I'm feeling better about it.
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IGR
  |     |   580 posts since 2020
Treasury yield isn't calculated, it is assumption based on best case investment outcome, in most cases, for retail investors, impossible to achieve scenario... I'll leave it as that.
Definitely, having single account that aggregates all fixed income holdings is a convenience.
Most Brokers provide an an enablement to accumulate every kind of positions, fixed or not.
While Brokers make profit of transactions or leverage opportunity, Investors get paid with the piece of mind and convenience... intangible aspects impossible to translate into yield.

To answer your question with the question... How can you be wrong while feeling good and comfortable?
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