CDs and Treasuries are two popular vehicles for investors to maximize returns without taking much (if any) credit risk. The average American is probably more familiar with CDs even though Treasuries are a better vehicle for most people. Learn why below:
CD stands for certificate of deposit and are issued by banks. There are two main types of CDs. Traditional CDs are typically advertised to a bank’s clients and potential clients. Brokered CDs are distributed through brokerages and investors can purchase them at issuance or trade them. Read more about brokered CDs vs bank CDs.
Treasuries are refer to bonds issued by the US Treasury. Treasury bonds, notes, and bills are all the same thing and the different words are used to denote the term of the bond at issuance (bonds are long-term, notes are intermediate, and bills are short-term). This article focuses on shorter-term maturities since CD are generally shorter-term.
Safety
CDs
Both CDs and Treasuries offer government guarantees, although the terms and entities are slightly different.
CDs and other types of bank accounts are typically insured by the Federal Depot Insurance Corporation (FDIC), which insures up to “per depositor at each insured bank and savings association.” Those with more than $250,000 can use multiple registrations and/or multiple banks to obtain a higher amount of protection (in aggregate).
The FDIC is essentially an insurance plan that banks pay into to protect their customers in case the bank fails. If there were massive numbers of bank failures that overwhelmed the FDIC’s ability to make depositors whole, the FDIC’s website states two contingency plans:
- Plan A would be to draw on a line of credit with the US Treasury. Essentially get a loan from the Treasury.
- Plan B is that the FDIC is backed by the full faith and credit of the US government (which is another way of saying the Treasury would cover any shortfall). This is probably true, but I imagine it would require congressional approval which could be politically fraught.
However, no FDIC insured deposits have been lost due to bank failure since the FDIC was established in 1933.
Treasuries
Treasuries are not insured in any way. So there is no dollar limit, since there is no insurance in the first place.
The US Treasury says it will pay back principal and interest and people accept that (although it gets a little dicey every time there is a debt-ceiling standoff in the US). That being said, I would argue that Treasuries are theoretically safer than CDs since the Treasury backs the FDIC. Of course, you should not park money in Treasuries if there’s a chance that the US will sanction you, as Russia learned in 2022 (the US simply confiscated their Treasuries, which are of course just digital assets sitting on ledgers in the Treasury computer system).
I suppose there is a scenario where the US government defaults (due to a debt ceiling battle or something else) and Treasury payments don’t get made while banks still honor CD payments. This seems unlikely to me, but I suppose it is theoretically possible.
Liquidity
Treasuries are generally accepted to be the most liquid asset in the world. It is generally very easy and low cost to buy or sell Treasuries.
CDs are a slightly different story. CDs offered by banks directly to consumers are generally illiquid. Investors typically buy a CD for a certain term directly from the bank and there is often an early withdrawal penalty. Brokered CDs are issued by banks through brokerages and investors can buy them at issue or trade them on a secondary market. So brokered CDs are relatively liquid, but not to the same extent as Treasuries. I would personally never buy a CD from a bank, although I would consider a brokered CD.
Rates
This does not always hold true, but Treasuries generally yield the most, followed by brokered CDs with traditional CDs generally yielding the lowest. Of course there is a range, so the highest yielding brokered CD may exceed Treasury rates (as an example). One thing to look out for with traditional CDs are limits on how much can be deposited. The rate may be higher for the first $10,000 (as an example) and lower on any additional amounts.
Taxes
Treasuries have much more favorable tax treatment than CDs. Both Treasuries and CDs generate interest income, which is taxed at ordinary income tax rates. However, Treasuries are exempt from state and local tax, which can be quite high in places like California or New York City. For residents in high tax states or cities, using Treasuries over CDs is probably a no-brainer for taxable accounts.
Other Considerations
i have recommended CDs to some people in the past if their state tax rate is low, don’t need the liquidity, and are older and just more comfortable with CDs. Sometimes it is better to keep retirees in their comfort zone than push them outside their comfort zone, in my opinion. I’m a big proponent of only investing in things that one understands. However, I recommend Treasuries much more frequently than CDs.
