CDs vs bonds [US treasury bills] for individuals

Generally CDs and US treasury bills [from treasurydirect.gov] are considered the safer forms of investmet. But its not clear how an individual would go about choosing between these two modes. I would like to hear opinions from knowledgeble folks on how to choose between them [or in what cases would us treasuries be a better investment?]

So far I've figured out the following:

CDs:
- simple to evaluate the APR/APY
- automatically gets renewed at the end of the term [if I decide not to get money out]
- [for some CDs ]can add in money during mid-term
- FDIC insurance..

US Treasuries :
- state tax benifit [but harder to evaluate vs CDs]
- can also use 4week note [instead of the 3 month minimum for CD]
- however one can purchase only in multiples of $1000
- yield earned [which won't be a multiple of $1000] can't be rolled over - so it won't compound.
- and one has to preschedule repeat purchases to get the effect of automatic rollover of CDs - so it involes lot more planning and monitoring.

Given that investing in CDs apppear to be a lot simpler - what would be the reasons for choosing treasuries?

thanks,

Those of us in high income tax states get an effective 0.5% increase in yield by buying Treasuries. If you're nickel & diming, who cares, but some folks move $100's of thousands back and forth in fixed-income instruments.

TreasuryDirect is very quick about transfering funds to and from linked accounts. The hassles involved with setting up a new CD account at whatever bank or credit union is offering the best rate that month can be substantial. TD takes a little while to get the hang of, but I find ease of use greater than it would be dealing with multiple banks.

You have clearly given the subject considerable thought.

In the current environment, bank CDs offer equivalent safety, and significantly higher interest rates, than Treasuries. This has not always been the case. I have charted Treasuries vs. I-Bonds (savings bonds), and less formally compared them with CDs.

Each type of fixed-income investment has advantages and disadvantages, depending upon the time frame you are looking at, and whether interest rates are stable, rising or falling.

In the past, Treasuries have sometimes offered higher interest rates, than bank CDs. The increasing availability and ease of investing in bank CDs, over the internet (with banks that are not local), is making this market more competitive, and forcing higher rates. Perhaps, CD rates will always be higher than Treasuries, because of this new factor...but it's hard to predict.

It also depends upon whether you plan to hold to maturity. I am an income investor, and you sound like one, also. I do plan to hold my bond/ CD ladder to maturity. On the other hand, you never know when you might need money. If you own a Treasury, you can sell it, without a penalty (less a commission, and the value may be higher or lower, than you paid for it). If you to cash a CD out early, there is usually a significant interest penalty.

 An alternative to holding for income, is to trade bonds (which institutional buyers may prefer). Institutional buyers, including bond funds, pension funds, central banks, etc. aren't allowed to buy CDs or Savings Bonds. Nor would they necessarily want to...they are looking for a gain, in the value of the bond. Individuals can do this, also.

When interest rates are falling, the value of a Treasury will rise. If you own a Treasury, you can sell it, for a capital gain. If interest rates fall, you are locked into your CD, unless you want to cash it out early, which usually entails a significant interest penalty. You can't get a capital gain, from a CD.

Mish and Brian have posted good charts, showing how the 10-year Treasury yield has dropped (in a channel) for the past 30 years. Based on expected continuation of this trend, they have recommended buying Treasuries. They expect the value of the bonds to increase.

As an income investor, I would rather get a higher interest rate, over the lifetime of a bond or CD, than sell, for a capital gain. But, that's just me. Bond trading is a huge market.

Incidentally, I have stopped buying auction Treasuries at TreasuryDirect.gov. I don't like the fact that they do not send out statements. Both Fidelity and Vanguard allow customers to place auction bids, at no charge. They do have good recordkeeping and statements. They also have secondary-market Treasuries and TIPS (for which you have to pay a commission).

Here is this year's Treasury auction schedule.

http://www.treas.gov/offices/domestic-finance/debt-management/auctions/auctions.pdf

You may not find anything attractive...but, then again, you might :-).

I'm comparing the current CD rates, with the 5-year TIPS rate. For the TIPS, you have to figure in the probable coupon (currently, 2.28%, significantly lower than a few months ago) and the probable inflation rate, over the next 5 years. If you can get a 5-year CD for 5.75% (special rate, from Pentagon Federal Credit Union), and the 5-year TIPS rate is 2.25%, then inflation would have to be 3.5%, for the TIPS to come out better. Wow, the Federal Reserve would have a cow!

I'd like to hear your opinion, about this.

Wendy