CD vs Bonds

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Topic Author
Amity
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Joined: Mon Dec 16, 2024 5:45 pm

CD vs Bonds

Post by Amity »

I have 2 Million to invest in fixed income. CDs offer clear returns. Confused on bond returns. This portion - the 2M - needs to be ability to sleep at night fixed return investment.
Age: Spouse & me 62
NW: 9M
Equities: 4.5M. These are index funds, some dividend etfs, individual stocks, international etfs, etc
Restate: 2.5M

Not yet retired. But can be retired anytime! No debt. Children on their own. No pension, SS after 70.

Thanks Much. Just do not understand bond returns.
kobbiemandd
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Joined: Fri Mar 18, 2011 6:54 pm

Re: CD vs Bonds

Post by kobbiemandd »

As opposed to CDs that I used to favor, I have been buying treasury securities. The added kicker is they are state tax exempt whereas CDs are not. I buy them through Vanguard and treasury direct.
dbr
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Re: CD vs Bonds

Post by dbr »

CDs are fine. Sometimes interest rates are low. Bond returns can also be low.

You can put in time and effort to learn more about bonds or just stick to what you know.

If the main point is to have some of your money not in stocks CDs do that just fine.
blortchplop
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Re: CD vs Bonds

Post by blortchplop »

Zero coupon bonds are very similar in behavior to CDs. You buy them at a lower price, the value compounds at the interest rate on the bond, and you redeem them at a higher price at maturity. Shorter duration treasury bills work this way. Longer duration zero coupon treasuries that work this way are called STRIPS.

Regular treasury notes and bonds throw off a coupon payment every 6 months based on the coupon rate and return the original principal of the bond at maturity.

A lot of people on the forum like TIPS for sleep at night fixed income. These are a bit like regular treasury bonds (they throw off coupon payments) but the principal value is also adjusted for inflation, so they provide protection against inflation. This linked article is a good basic explanation of TIPS.
jebmke
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Re: CD vs Bonds

Post by jebmke »

kobbiemandd wrote: Sun Feb 02, 2025 4:41 pm As opposed to CDs that I used to favor, I have been buying treasury securities. The added kicker is they are state tax exempt whereas CDs are not. I buy them through Vanguard and treasury direct.
Treasuries are also more liquid. At times this is to the advantage of a CD investor in deferred accounts if there is a significant liquidity premium for like duration assets and there is no risk of needing to liquidate. There was one point where CD yields in brokerage were quite favorable to treasuries. It has been a long time since i looked.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
LuckyGuy
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Re: CD vs Bonds

Post by LuckyGuy »

I would consider a TIPS ladder. Especially if you can do one in a tax deferred account.
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Hacksawdave
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Re: CD vs Bonds

Post by Hacksawdave »

It will all boil down to when you format a cashflow plan and calculate your estimated tax brackets when you transition to retirement. I have not had a CD since 1996 as the ordinary income was counterproductive, and as much in early retirement. In your case having fully taxable ordinary income might work well. Sounds like you have some math to work out and then select a path.

There are multiple selections under the rainbow one can make for generating ‘reliable income’ for cashflow instead of relying on what equities do. I use a combination of everything except CDs, individual bonds, or annuities.
snic
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Re: CD vs Bonds

Post by snic »

Amity wrote: Sun Feb 02, 2025 4:16 pm I have 2 Million to invest in fixed income. CDs offer clear returns. Confused on bond returns. This portion - the 2M - needs to be ability to sleep at night fixed return investment.
Age: Spouse & me 62
NW: 9M
Equities: 4.5M. These are index funds, some dividend etfs, individual stocks, international etfs, etc
Restate: 2.5M

Not yet retired. But can be retired anytime! No debt. Children on their own. No pension, SS after 70.

Thanks Much. Just do not understand bond returns.
It would help if you explained what exactly you don't understand, that you would like explained. I mean, in principle, CDs are just a form of bond - you lend the issuer some money, and they pay you back with interest.
"Financial ignorance is expensive."
Topic Author
Amity
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Joined: Mon Dec 16, 2024 5:45 pm

Re: CD vs Bonds

Post by Amity »

Thank you for educating me. I have a list of options will look into based on your comments.

To the question of what I do not understand - so several of my “bond” holdings went down since I first dabbled in these say 5 years ago. Whereas CDs always are truly “fixed” - and in this interest environment returns of 4.5 to 6%. For this part of my portfolio, looking for a fixed return and no surprises.
Parkinglotracer
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Location: Central NY we call upstate

Re: CD vs Bonds

Post by Parkinglotracer »

If you hold your treasury bonds until they mature they will be Worth their face value. Between when they are issued and when they mature they fluctuate in value as interest rates change. A bond ladder as described in our wiki can help you set up a plan so you have bonds maturing as you need the money. You can do a cd ladder too.
mrsbetsy
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Re: CD vs Bonds

Post by mrsbetsy »

It really comes down to your state tax rate. When we compare treasuries vs CDs - CDs win most of the time. Our state tax rate is 4% so the difference is miniscule. We are in our 2nd year of retirement.

We just bought a 2 year CD today at 4.3% and pays monthly. It throws off enough that we don't have to touch the principal in any account and my husband sleeps well at night. It's too conservative for me but I don't get to make these decisions in a vacuum.

We are 50% equities and 50% fixed.
Topic Author
Amity
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Joined: Mon Dec 16, 2024 5:45 pm

Re: CD vs Bonds

Post by Amity »

This was my first post. And so grateful for this forum and these responses. A huge help. Joined Bogleheads a few months ago. Just amazing. A true community. Thank you.
tibbitts
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Re: CD vs Bonds

Post by tibbitts »

My guess is that a few years ago somebody would have asked about federal and state marginal tax rates and mentioned munis by now, but lately the forum is all about Treasuries, and especially TIPS ladders. Munis seem to be relegated to the REIT/SCV/commodities trash heap of history.
coachd50
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Re: CD vs Bonds

Post by coachd50 »

Something I didn’t see mentioned is default risk

The OP seems to want as sure a thing as possible. If the OP is looking to invest $2 million, wouldn’t that make short term treasuries (or a treasury ladder depending on cashflow needs) superior given that such a sum would exceed FDIC insurance limits. The OP would have to shop at several different banks
secondopinion
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Re: CD vs Bonds

Post by secondopinion »

coachd50 wrote: Sun Feb 02, 2025 11:41 pm Something I didn’t see mentioned is default risk

The OP seems to want as sure a thing as possible. If the OP is looking to invest $2 million, wouldn’t that make short term treasuries (or a treasury ladder depending on cashflow needs) superior given that such a sum would exceed FDIC insurance limits. The OP would have to shop at several different banks
True. It is difficult at this scale to get great rates on all the money and still have insurance apply.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
mrsbetsy
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Re: CD vs Bonds

Post by mrsbetsy »

coachd50 wrote: Sun Feb 02, 2025 11:41 pm Something I didn’t see mentioned is default risk

The OP seems to want as sure a thing as possible. If the OP is looking to invest $2 million, wouldn’t that make short term treasuries (or a treasury ladder depending on cashflow needs) superior given that such a sum would exceed FDIC insurance limits. The OP would have to shop at several different banks
Not an issue if you buy them through your brokerage. Schwab has at least a dozen offerings from various financial institutions of noncallable CDs with a variety of years and coupon payment frequencies.
snic
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Re: CD vs Bonds

Post by snic »

Amity wrote: Sun Feb 02, 2025 9:11 pm Thank you for educating me. I have a list of options will look into based on your comments.

To the question of what I do not understand - so several of my “bond” holdings went down since I first dabbled in these say 5 years ago. Whereas CDs always are truly “fixed” - and in this interest environment returns of 4.5 to 6%. For this part of my portfolio, looking for a fixed return and no surprises.
The market value of bonds declines when interest rates go up. Here's an intuitive example: Let's say you buy a 10 year bond now that pays 4.5% interest. Over the next year, the prevailing rates go up to 6%. You decide to sell the bond. Would you expect anyone to buy your bond for the amount you paid for it when they can buy a new bond that pays 1.5% more? Of course not - and similarly, if prevailing rates go down to 3%, your bond that pays 4.5% is now more valuable and you can sell it for more than you bought it for.

So, the market value of bonds fluctuates. However, when the bond matures and the issuer gives you your money back, you always get the entire amount you bought it for (assuming you bought it at issue, not on the market - and assuming the issuer doesn't default). CDs work exactly the same way. Most of us aren't used to selling CDs on the open market because you generally can't sell a CD you bought at a bank that way, but CDs bought through a brokerage actually can be traded. And their market values fluctuate as the prevailing interest rates change, just like bond values.

There aren't many questions about bonds that aren't answered in this book, which I highly recommend to anyone interested in buying bonds: https://www.amazon.com/gp/product/0312353634
"Financial ignorance is expensive."
MikeG62
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Location: New Jersey

Re: CD vs Bonds

Post by MikeG62 »

kobbiemandd wrote: Sun Feb 02, 2025 4:41 pm As opposed to CDs that I used to favor, I have been buying treasury securities. The added kicker is they are state tax exempt whereas CDs are not...
Same for me. I also have been buying Agency bonds - FHLB and FFCB.

CD's can be a pain in that you might end up opening accounts all over the place to take advantage of CD specials. Also, you need to move funds quickly. This can be a challenge if the funds are in an IRA.
Real Knowledge Comes Only From Experience
Topic Author
Amity
Posts: 5
Joined: Mon Dec 16, 2024 5:45 pm

Re: CD vs Bonds

Post by Amity »

Thanks all. Your responses were most helpful. Hope to pay it forward on the BH board.
Rajsx
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Location: Florida

Re: CD vs Bonds

Post by Rajsx »

For our IRAs I see 3 yr CDs at Fidelity in 4 + odd % range, but also see a MYGA from a reputable company A++ at Fidelity at 5% for 3 yrs on a $100k minimum deposit. I am leaning towards the MYGA.
I live in Florida with no state tax, so State Tax Exemption of the Treasury investments is not relevant for us.
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