I just did a bit of research comparing CDs with US Treasuries. With the rise in interest rates, US Treasury note rates compare very favorably to CDs.
Here are the most current rates:
Term Rate
1 year 2.00%
2 year 2.21%
3 year 2.38%
5 year 2.63%
Even better, interest on treasuries is exempt from state and local taxes. Here’s the equivalent yields if you live in a typical tax state (5% tax rate) and high tax state (10% rate):
Term Rate Equivalent (5% state tax) Equivalent (10% state tax)
1 year 2.00% 2.11% 2.22%
2 year 2.21% 2.33% 2.46%
3 year 2.38% 2.51% 2.64%
5 year 2.63% 2.77% 2.92%
With taxes taken into account, for most people treasuries offer better returns than all but the best CDs.
Treasuries also have some big advantages over CDs:
1. You can sell treasuries in roughly $1K increments. If you want to cash in a CD, you generally must redeem the entire CD.
2. You definitely can sell a treasury whenever you want. Your legal right to do an early withdrawal on a CD varies from bank to bank, and is often unclear.
3. Treasuries are guaranteed by the US Government in any amount. There’s no $250K FDIC limit.
4. You’ll never need to chase the highest rate from bank to bank. Treasuries have the same yield everywhere.
5. You can invest in treasuries with highly competent companies like Schwab and Fidelity. Many of the banks that offer the highest CD rates have poor customer service.
The only advantage that CDs might have is if you are doing an early withdrawal. The penalty for CDs is always a certain number of months of interest, regardless of how much time is left in the term or how much interest rates change. In contrast, treasuries will drop in value if interest rates rise. This “early withdrawal penalty” will be roughly the change in interest rates times the years left in the term. For example:
• If interest rates stay the same, there is no early withdrawal penalty.
• If you buy a 1 year treasury, want to cash it in after 6 months and interest rates have gone up .25%, you will pay about a .125% penalty (about 3 weeks).
• If you buy a 5 year treasury, want to cash it in after 3 years, and interest rates have gone up 1%, you will pay about a 2% penalty (about 9 months).
• If you buy a 5 year treasury, want to cash it in after 3 years and interest rates have gone up 2%, you will pay about a 4% penalty (about 18 months)
I would say short-term treasuries will usually be better than short-term CDs if you want to do an early withdrawal. If interest rates rise significantly, though, longer-term CDs will have the advantage over longer-term treasuries.
