Don’t Even Think About Buying Bank CDs. Here’s Why.
If you’re the type who insists on the safety of bank money market accounts and certificates of deposit, your time has finally arrived.
After years of waiting, you’re earning more than a pathetic pittance on your savings. But there’s a simple way to earn even more without taking on more risk: investing in United States Treasurys.
Following are many reasons you should be putting money in Treasury securities instead of bank certificates of deposit or savings accounts.
1. Treasurys pay more
As you’re likely aware, rates have been steadily rising this year as the Federal Reserve jacks interest rates to crush inflation.
Rising rates show up everywhere, including banks. But the interest on Treasury bills (maturing within one year), notes (maturing from two to 10 years) and bonds (maturing from 20 to 30 years) are now paying more than the vast majority of bank offerings, and they’re adjusting faster to rising rates.
Take a look at the CD rates in our Solutions Center, and you’ll see rates on 1-year CDs are ranging from 3.25% to 3.9%. And these aren’t just average rates; they’re some of the best available nationwide.
Now, here’s a look at rates on Treasury securities, ranging from 1-month to 5-year maturity, from when I checked this on Oct. 11:
- 1-month: 2.952% yield
- 3-month: 3.434%
- 6-month: 4.107%
- 1-year: 4.264%
- 2-year: 4.289%
- 3-year: 4.323%
- 5-year: 4.119%
As of that moment, you could earn more than 4% on a 6-month Treasury bill and more than 4.25% on a 1-year: higher than the best CD rates.
As with bank rates, Treasury rates adjust constantly. You can find current rates where I did, here at CNBC.com, or many other finance websites.
The next time the Fed raises rates — most likely at their next meeting on Nov. 2, 2022, check Treasury rates again. They’ll likely be even higher.
2. Treasurys are easy to buy
There are several ways to invest in Treasury securities. Here are a few of the simplest.
- You can buy them directly from Uncle Sam at TreasuryDirect.gov. You simply establish an account, much like you would an online bank account, then buy T-bills, notes and bonds whenever they’re issued. TreasuryDirect is also a great place to learn more about all kinds of Treasury securities, including the popular I-Bond, now paying more than 9%.
- You can buy Treasury securities at most commercial banks. Call your bank for details, or do a search for “buying Treasurys through (your bank’s name).”
- You can buy Treasurys through brokerage firms, like Vanguard, Charles Schwab or Fidelity. Broker-dealers like these can also sell your securities prior to their maturity. For example, say you invest in a 5-year Treasury and need to sell before the five years is up. They’ll sell it for you in the secondary market. However, the price could be more or less than you paid for it. (In general, if rates have gone down, it will be worth more than you paid. If rates have gone up, less.)
3. Treasurys are safer
Wait, aren’t CDs completely safe? Yes. Providing you buy certificates of deposit through an FDIC-insured bank, your investment is guaranteed by an agency of the U.S. government for up to $250,000 per depositor, per insured bank, for each account ownership category.
Treasurys, on the other hand, are direct obligations of the U.S. government. Since the government can print money, by definition, it can’t default on its debt. Thus, while CDs are insured and perfectly safe, technically direct obligations are the safest thing there is.
4. You can invest (almost) as much as you want in Treasurys
As you’ll note above, there are limits to the insured amounts you can invest in certificates of deposit. With Treasury securities, the limit is $10 million per security type and term, per auction, per household.
And since the U.S. government is forever financing its massive debt, there will never be a shortage of securities to invest in.
5. You don’t pay state income taxes on Treasurys
The interest on certificates of deposit is taxable on both the federal and state level. The interest on direct obligations of the U.S. Treasury is only taxable at the federal level: no state taxes. If you’re in a high-tax state, that effectively raises the yield.
Bottom line: Check out Treasurys
This year has brought about massive changes in financial markets. The Fed’s assault on inflation has crippled the stock market, but it’s created savings rates we haven’t seen for many years.
When times change, we’ve got to change with them. I’ve been investing for 40 years, but made my first Treasury purchase about a month ago. Take a few minutes to explore what’s out there.
As I like to say, spending a little time now could mean spending a little more money later.
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