Q: I've been looking into alternatives to CD rates, since they are so low these days. I noticed that five-year Treasury bonds are paying 2.30 percent, which is higher than most of the CD rates I've been seeing. Any reason I shouldn't put my money in Treasuries instead of CDs?
A: The contrast between CD rates and Treasury bond yields right now is interesting. CD rates are higher for short-term periods, but once you get to around the two-year mark, Treasury yields start being higher. By the time you get to five-year terms, Treasuries are yielding around 2.30 percent, while the average CD rate at that length is just 1.58 percent.
So, does that mean that U.S. Treasury bonds are a viable alternative to CDs for the average depositor? It's not as clean a fit as you might think, for the following reasons:
- Trading Treasury bonds in small denominations (certainly, less than $10,000 face value) can be expensive. The upshot is that the yield you see listed may not be the yield you get once trading spreads are factored in.
- Treasury bonds will fluctuate in price. This can go for you or against you, but be advised that unless you buy and hold a bond to maturity, you might not get the yield you thought you were buying.
- Bond funds have a couple drawbacks. Bond funds can be a way for smaller investors to get into the bond market, but they carry fees that will chip away at the yield you could be earning. Also, active trading may mean that you never realize the yield you think you're getting.
A more practical strategy might be simply to shop for the best CD rates. While average five-year CD rates are at 1.58 percent, the best CD rates at that length are above 2.50 percent. That's even better than five-year Treasury yields--and without the complications.
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