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Comparing The Tax-Equivalent Yields Of A 6-Month T-Bill And A 6-Month CD As Of 7/21/2023

RichardW
  |     |   821 posts since 2019

This post revisits and updates my previous 1/6/2023 post (https://www.depositaccounts.com/community/misc/51048-comparing-taxequivalent-yields-6month-tbill-6mo...) with current T-bill yields.

If you are planning to buy some short-term CDs soon, don’t forget to consider short-term Treasurys. Depending on your taxable income and state of residence, their tax-equivalent yields continue to be appealing. As an example, let’s use the 6-month T-bill. From the Daily Treasury Par Yield Curve Rates (https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treas...), the 6-month T-bill had a yield of 5.53% as of 7/21/2023. According to the Taxable-Equivalent Yield Calculator available at Fidelity, if your principle state of residence is California, and your estimated taxable income is $59,000, and your federal tax filing status is single, the 6-month T-bill at 5.53% has a tax-equivalent yield of a 6-month CD at 6.26%. Changing the estimated taxable income to $118,000 and the federal tax filing status to married filing jointly produces the same tax-equivalent yield of a 6.26%. If you change the state to New York and leave all the other variables the same, the 6-month T-bill at 5.53% has a tax-equivalent yield of a 6-month CD at 6.04%. Repeating this procedure for Nebraska generates a result of 6.14%. For Missouri the result is 5.99%.

The results listed above neglect local income tax and assume that the Treasury Bill and the comparable CD are held in a taxable deposit account. The Taxable-Equivalent Yield Calculator available at Fidelity (https://digital.fidelity.com/prgw/digital/taxyieldcalc/) neglects NIIT (Net Investment Interest Tax), neglects AMT (Alternative Minimum Tax), and expresses yield as the effective annual rate of return in percent.

I utilized the 6-month T-bill yield of 5.53% (as of 7/21/2023) in the scenarios listed above. However, repeating the procedure for the 4-month T-bill yield of 5.54% (as of 7/21/2023), or the 3-month T-bill yield of 5.50% (as of 7/21/2023), or the 2-month T-bill yield of 5.54% (as of 7/21/2023), or the 1-month T-bill yield of 5.43% (as of 7/21/2023) also produce notable results.

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MY2CENTSWORTH
  |     |   440 posts since 2016
Good info RichardW! I appreciate the refresher and thank you for taking the time to outline the difference and include the links, especially because I write a check to NYS every three months annually. As the Fed winds down their interest rate hikes in the next few months this may definitely be worth looking at for shorter term deposits than I am accustomed to as I begin having to take RMD's that I will be reinvesting in taxable accounts.
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w00d00w
  |     |   360 posts since 2012
for taxable accounts, something else to consider with the 6 month Tbill is that buying those being auctioned this month or later (having maturities in 2024) will defer the earned interest income from tax year 2023 to 2024.  same with 6 mo CD that pays interest only at maturity.
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Rightdx
  |     |   43 posts since 2022
Another advantage of Treasuries over CD's is that they are much more liquid if you need your money back. For now, I'm keeping short term money in Treasuries while I wait for the right time to lock in some long term CD's and I don't have to worry about early withdrawal fees or illiquid brokered CD's.
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rockies
  |     |   295 posts since 2018
I thought RichardW's original January 6 post on this topic was awesome....and this July 23 post is equally good. I especially like that he added the 4-, 3-, 2- and 1-month rates. Perhaps he knew today (July 24) was going to be a record setting day for short term rates.

Using the Daily Treasury Par Yield Curve link, one can see that records were set today for the 2-month (5.54%), 4-month (5.55%) and 6-month (5.55%). The 3-month (5.51%) is only 4bps from its record for this cycle.

And, at the risk of being a bit repetitive on the many advantages of T-bills (vs. certificates from banks/credit unions), here are a few that I especially appreciate:

-No new application required for each purchase
-No ChexSystems inquiries
-No soft or hard credit pulls
-No crazy high minimum balance requirements ($100 for TreasuryDirect and $1,000 for most brokerages vs. an institution like NASA FCU with a $10K minimum on its 9-month certificate )
-No need to spend time meeting convoluted credit union membership requirements by joining a charity/library/association/etc (or figuring out how to qualify via virtual worshiping at a local church as some have mentioned on this site)
-No "prior consent" from bank or credit union required to access my funds early
-No manipulative "grace period" upon maturity
-No $250K FDIC/NCUA insurance limits to manage
-A very efficient and easily used secondary market to buy and sell T-bills at any time

In addition to super tax-equivalent yields, there are many other advantages to T-bills vs. bank/credit union certificates.
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111
  |     |   672 posts since 2019
rockies - ... "No crazy high minimum balance requirements ($100 for TreasuryDirect and $1,000 for most brokerages vs. an institution like NASA FCU with a $10K minimum on its 9-month certificate)" ...

Agreed. One might also add, "No crazy LOW MAXIMUM balance requirements, by financial institutions that are striving to protect themselves from both short- and long-term rate fluctuation. Certainly from their perspective they are wise to do this, but such protective clauses always come at the expense of the depositors.
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111
  |     |   672 posts since 2019
I also want to thank RichardW for his information a few months ago concerning the advantages of short-term Treasuries in today's rate environment, especially in states with mid- to high state income taxes. I've put some of the funds coming off 5-year CDs into short-term Treasuries (and also some into 4-year CDs just for short/long balance).
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