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investing in short term treasury vs CDs

Posted: Sat Feb 02, 2019 12:22 pm
by bb
Is the expected return of short term treasuries and CDs about the same?
Does the FDCIC insurance equate to higher safety or just lower volatility?

Re: expected return of short term treasuries vs CDs

Posted: Sat Feb 02, 2019 12:45 pm
by michaeljmroger
Yes, they’re close. For example, SCHO currently yields 2.5% while 2-year CDs are around 2.65%. The treasuries are more liquid though, and if you live in a state with high taxes like CA, the treasuries will likely return a bit more after taxes.

Re: expected return of short term treasuries vs CDs

Posted: Sat Feb 02, 2019 12:47 pm
by gmaynardkrebs
bb wrote: Sat Feb 02, 2019 12:22 pm Is the expected return of short term treasuries and CDs about the same?
Does the FDCIC insurance equate to higher safety or just lower volatility?
I'm not sure what you mean by "expected" return The interest rate is known with certainty at issuance for T-bills, and for plain-vanilla fixed term CDs. If you mean the "usual" return, it is true that if you shop around, you can usually get a slightly better rate with a CD. However, the latter are subject to state income tax, so you would want to figure that into your comparison if applicable, as well any penalties for early withdrawl. For all practical purposes they are equally safe and completely guaranteed, although FDIC insurance is limited per institution. The FDIC insurance has nothing to do with volatility as far as I know. Why do you think it might?

Re: expected return of short term treasuries vs CDs

Posted: Sat Feb 02, 2019 6:18 pm
by bb
Sorry - I was thinking of a short term treasury fund - so value will fluctuate - which I was equating to safety or volatility - as compared to a CD. And also if interest rates go down presumably value of fund would go up - so that is why I used the word expected. Note - not that I am using correct language for this discussion.

Re: expected return of short term treasuries vs CDs

Posted: Sat Feb 02, 2019 11:16 pm
by gmaynardkrebs
bb wrote: Sat Feb 02, 2019 6:18 pm Sorry - I was thinking of a short term treasury fund - so value will fluctuate - which I was equating to safety or volatility - as compared to a CD. And also if interest rates go down presumably value of fund would go up - so that is why I used the word expected. Note - not that I am using correct language for this discussion.
yes, a short term treasury fund will fluctuate, and you could even lose a little money. However, there is no default risk, same as with an FDIC insured account, provided you are not over the FDIC limit for that bank.

Re: investing in short term treasury vs CDs

Posted: Sat Feb 02, 2019 11:33 pm
by Day9
I've read FDIC insurance only covers the return of principal with CDs, whereas with Treasuries both your principal and the interest coupons are guaranteed. Could someone confirm this? It's probably not a big deal either way though.

EDIT: Thanks RickBoglehead, please see his response below.

Re: investing in short term treasury vs CDs

Posted: Sat Feb 02, 2019 11:38 pm
by aspiringboglehead
I've been wondering about a similar question: Does anyone have a sense, historically, of how Treasury bills have compared to savings-accounts rates at banks? I wasn't able to find good data about this online.

In the extremely low-rate environment after the 2008 financial crisis, good banks tended to do better than Treasury bills and money-market funds, but that has recently changed. I'm curious if anyone has a memory or perspective on the same comparison over the last several decades. To make it concrete, would a fund like VUSXX have done better than the best savings accounts you could find at a bank through most of the past 50 years? (In other words, was the low-rate environment after the 2008 financial crisis aberrational in this respect?)

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 12:16 am
by GrowthSeeker
I think I saw a graph on this site within the last few months that showed historical CD rates vs Treasury rates; my impression was that sometimes one is higher and sometimes the other is higher.

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 8:00 am
by RickBoglehead
Day9 wrote: Sat Feb 02, 2019 11:33 pm I've read FDIC insurance only covers the return of principal with CDs, whereas with Treasuries both your principal and the interest coupons are guaranteed. Could someone confirm this? It's probably not a big deal either way though.
That is false. Via Google:

FDIC insurance covers depositors' accounts at each insured bank, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank's closing, up to the insurance limit. The standard insurance amount is $250,000 per person, per bank, per ownership category. Additional information on deposit insurance coverage can be found in the Your Insured Deposits brochure.


https://www.fdic.gov/deposit/covered/notinsured.html

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 12:12 pm
by bb
If short term treasury and CDs have about the same yield, and if principal and interest is protected for a CD aren't CDs a superior investment?

Re: expected return of short term treasuries vs CDs

Posted: Sun Feb 03, 2019 12:15 pm
by JTColton
michaeljmroger wrote: Sat Feb 02, 2019 12:45 pm Yes, they’re close. For example, SCHO currently yields 2.5% while 2-year CDs are around 2.65%. The treasuries are more liquid though, and if you live in a state with high taxes like CA, the treasuries will likely return a bit more after taxes.
NFCU is offering 17 mo CDs at 3.25%, I stopped re-investments on my T-Bill ladder and am going to throw it in that CD.

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 12:18 pm
by SlowMovingInvestor
bb wrote: Sun Feb 03, 2019 12:12 pm If short term treasury and CDs have about the same yield, and if principal and interest is protected for a CD aren't CDs a superior investment?
Short Term Treasuries are

1) Direct US Gov Obligations, so have even more protection
2) Are more liquid
3) Are state tax free

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 12:49 pm
by Prudence
Also, a ST Treasury bond fund position can adjust to increasing interest rates and increasing inflation.

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 4:46 pm
by bb
Which one is a better investment?

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 4:52 pm
by Prudence
It depends. I like the ST Treasury fund instead of CDs of comparable duration, except when I can get a good rate such as the 3.25% deal JTColton mentioned above.

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 4:59 pm
by gmaynardkrebs
bb wrote: Sun Feb 03, 2019 4:46 pm Which one is a better investment?
For all practical purposes, they are the same. The differences are negligible compared to all other investment options.

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 5:04 pm
by pascalwager
The Vanguard Treasury Money Market Fund (2.32% yield) is actually a better deal than the Short-Term Treasury Fund (2.51% yield) because the increase in yield is only 10.5 basis points per year of increased duration when using the short-term fund.

Re: investing in short term treasury vs CDs

Posted: Sun Feb 03, 2019 5:11 pm
by gmaynardkrebs
I don't know how much money you have, and I don't want to know, but if it's less than $100K and you are alert enough to make sure the interest rates are roughly comparable, the difference is not worth pondering.