U.S. Treasury Bonds Vs. CDs
U.S. Treasury bonds and certificates of deposit are considered low-risk, low-return investments. Investors choose these assets to diversify their portfolios and receive guaranteed income. Investors with a low risk tolerance are typically attracted to Treasury bonds and CDs. Although these assets behave similarly and are considered conservative investments, differences exist between the two.
U.S. Treasury bonds are fixed-income investments sold directly by the U.S. government on specific dates through a program called Treasury Direct. The bonds are also sold through brokers on the secondary market. Treasury bonds are backed by the full faith and credit of the U.S. government. Banks issue certificates of deposit to raise funds. Unlike Treasury bonds, investors can purchase CDs at any time. You deposit a fixed amount with the bank and the bank agrees to repay the original amount with interest at maturity. CDs valued up to $250,000 and issued by insured banks are protected by the Federal Deposit Insurance Corporation.
Treasury bonds are considered long-term investments. According to Treasury Direct, government bonds are issued with 30-year terms. You receive interest on your investment every six months. Unlike a CD, the income you receive is exempt from federal and state income tax. Maturity dates for CDs vary by financial institution. Unlike a Treasury bond, the maturity date for a CD can range from six months to several years. Higher interest rates are typically paid on CDs with longer terms.
Compared to other types of bonds, Treasury bonds typically pay lower interest rates because default and credit risks are much lower. The yield on Treasury bonds is determined at auction. Treasury bonds offer higher yields than other types of Treasury securities because of their longer maturities. Depending on the terms, a CD can offer a fixed or variable interest rate. The interest rates that banks offer for CDs are affected by the interest rate established by the Federal Reserve. When the Federal Reserve lowers short-term interest rates, banks lower the rates they offer consumers. The opposite occurs when the Federal Reserve increases short-term interest rates.
Treasury bond are liquid investments. You can hold Treasury bonds until maturity or sell them on the secondary market before the term is over. No penalty is assessed if you decide to sell your Treasury bond before the maturity date. CDs are not considered liquid investments. Some banks assess steep penalties if you withdraw your money early. You also lose the ability to earn interest on your investment.