Do you want to earn more than the current 5 year or 10 year Treasury bonds without giving up the safety they offer? Or maybe you just want a way to start saving without taking on the risks of the market. With treasury rates at all time lows, CD rates are a safe second option offering more flexibility and backed by the FDIC.
CD Rates Offer Flexibility
We’ve come a long way since the 30 year Treasury rate was above 5%. The last time was 2007. It’s been a year since the 30 year was above 4%. Today its hovering at a pitiful 2.59%, at or below the inflation rate. Not a great way to make money.
With interest rate risk (the heart of the bond price and yield dilemma) this high, it’s not worth it. When rates start rising, you’ll lose money if you sell the bond and if you hold it to maturity you’ll miss out on higher rates. Of course, it’d be even worse with a bond fund which will just lose value as rates rise.
When bond rates are this low, locking in a long-term rate is risky. It’s best to stick with short-term bonds, CDs, or money market accounts. If you are willing to take on more risk, a dividend stock, mutual fund or ETF is the better option. As interest rates start rising, you can slowly move your money into longer term bonds. The flexibility of using short-term treasuries, short-term government bond ETFs, or CDs offer a great option to transition into long-term treasuries when interest rates finally reach their peak.
Right now the only reason to buy Treasuries is safety. If you are willing to accept an interest rate below inflation, and still want the added safety, you have options. You can open an online savings account with a better rate than the 5 year Treasury and lock into a CD that is beating the 5 and 10 year Treasury rates. And you can do it at a lower duration. A lower duration, in turn, will offer more flexibility when rates start to rise.
It’s sad to say, but at these terms, treasury rates are terrible. But that’s the price we pay for short-term flexibility. You can open a free checking account with higher rates. Finding competitive CD rates isn’t hard.
Ally Bank has savings and money market account rates higher than the current 5 year Treasury rate, its CD rates are some of the best in the industry. You can lock into a multi-year CD, but Ally’s no penalty CD is competitive enough in this interest rate environment. The 5 year CD does beat the 10 year Treasury, but I wouldn’t recommend it. And with no minimum deposit, this is an easy decision.
Everbank has similar rates, its savings account even beats the 5 year Treasury as does the bulk of its CD options. If you want to lock yourself into a rate, stick with the 6 month or 1 year CDs. One thing to note, there is a minimum balance that needs to be met.
Be aware that some CDs have an early withdrawal penalty. If you need the money before maturity, think about using a no penalty CD or stick with a savings account. In the current interest rate environment every little bit counts. The competitive CD rates now available make CDs a viable substitute for the safety of Treasury bonds.
Rates may change daily. Review all rates, fees, and penalties before locking into any CD. All comparisons based on rates as of 7/19/12.