Comparing CDs and Treasuries

A businessman is walking down a road with many paths indicating choices between treasuries and CDs, at the end of the road is a dollar sign and a city.

When choosing an investment for your company’s cash, safety, liquidity, and returns are all important considerations. There are many investment options that meet these criteria, but two stand out above the rest when considering returns – CDs and Treasuries.

While CDs and Treasuries serve similar purposes in a business cash portfolio, there are key differences between the two. Understanding these differences is critical to choosing the type of investment that matches your needs.

Similarities Between Treasuries and CDs

Before reviewing the key differences between CDs and Treasuries, it is first important to understand how they are alike. These similarities generally include a set term, fixed interest rate, and safety.

CDs and Treasuries Are Purchased for a Set Term

Both CDs and Treasuries are issued for a specific length of time – known as the term.  CD terms generally range from 1 month to 5 years with a multitude of options in between. On the other hand, Treasuries terms range from about 1 month to 30 years.

The variety of terms that CDs and Treasuries offer allow your company to balance liquidity and return needs. For example, if you need to access your cash for a project in several years, you may choose a CD or Treasury with a multi-year term since investments with longer terms tend to pay higher yields than those with shorter terms.

Additionally, if you need to access your cash on a predictable schedule, you may consider a ladder strategy which involves purchasing investments with staggered terms. This technique allows you to ensure that cash is accessible when it is needed and earning a competitive return when it is not.

Rates for CDs and Treasuries Are Fixed

The interest rates for both CDs and Treasuries are fixed at the time of purchase. Therefore, your organization knows upfront how much interest you will earn and on what schedule. This predictability is a welcome contrast to other types of investments – like money market mutual funds – which offer variable rates of return.

CDs and Treasuries Offer a High Degree of Safety

Both CDs and Treasuries are considered extremely safe investments. Treasuries are backed directly by the federal government, while CDs are covered by FDIC insurance – which is also backed by the federal government. In fact, no depositor has lost a penny of FDIC-insured funds since the FDIC was founded in 1933.

As your organization searches for investment options that provide safety as well as a competitive return, CDs and Treasuries can appear similarly attractive. However, it is the differences between these investments that are often the determining factors for businesses.

Key Differences Between CDs and Treasuries

There are three important differences between CDs and Treasuries that you need to consider before committing to an investment. These are the process for early withdrawals, the variability of principal, and the rate of return.

Accessing Funds Before Maturity

If held to maturity, both CDs and Treasuries return the principal and any accrued interest to the investor. However, if an organization needs to access their funds prior to maturity, the process differs between CDs and Treasuries.

With CDs, your organization would request a redemption from the issuing bank and the funds would be returned less any early withdrawal penalty owed – typically 3-6 months’ interest. The specifics of this penalty are stated in the CD agreement, so you are always aware of the consequences of withdrawing funds early.

On the other hand, if your organization needs to access the funds invested in Treasuries, you must sell the securities on the secondary market. The resale value of a bond can vary dramatically during the term. This can put your principal at risk if you need to access funds prior to maturity.

Certain Situations Can Lead to Principal Loss

When you need to sell a bond on the secondary market, you receive the current value of the bond rather than your initial investment, and this can lead to an unexpected loss – or profit if you’re fortunate. Interest rates are one factor that can impact this resale value because bond yields and prices are inversely related. This means that as yields for new bonds rise, resale values for existing Treasuries fall.

For example, a 30-year Treasury, issued on February 15, 2022, with the CUSIP 912810TD0 was sold in $100 increments. On April 5, 2024, that bond was valued at 63.656250 or $63.66 – representing a $36.34 (36%) loss if it were sold. If your organization purchased this bond at issue and held it to maturity, you would receive the initial investment plus any accrued interest. However, if you needed to access the funds on April 5th, you would have been forced to liquidate at a lower value and lose over a third of the investment.

While Treasury prices can vary significantly over the term of the bond, CDs don’t lose value based on market conditions. This can provide an additional level of comfort for organizations investing in CDs because you know that principal is not impacted by market fluctuations.

Average Rates of Return Differ for Similar CDs and Bonds

CDs and Treasuries both offer competitive interest rates compared to savings and checking accounts. However, the rates that these two investments offer relative to each other can vary dramatically based on the purchase date, financial institution issuing the CD, and other factors.

When comparing monthly averages from June 2009 to March 2024, 6-month CDs outperformed 6-month Treasuries 52% of the time. On the other hand, 1-year CDs only outperformed 1-year Treasuries in 49% of months over the same timeframe. It’s important to note that these values refer to national averages, and since CD rates vary by bank, there are opportunities to invest in CDs that earn better than average returns.

CD Yields Vary by Bank

All Treasuries are issued by the same institution – the Department of the Treasury. On the other hand, CDs are issued by thousands of individual banks and credit unions across the country.

The rates that these banks offer for CDs depends on many factors including bank structure, individual bank needs, geography, and competition. These factors provide your organization the ability to invest with banks that pay higher than average rates by shopping the market.

In the past, finding banks that offer competitive rates has been a time-consuming task requiring consistent monitoring of rates from thousands of banks. Fortunately, finding competitive CD returns is now easier than ever.

Partner With the Cash Management Specialists at ADM

At the American Deposit Management Co. [ADM], we connect organizations seeking safety and competitive returns for their cash reserves with our nationwide network of financial institutions that need deposits. These institutions compete for business cash by offering competitive rates, so with ADM, it is easy to optimize the return on CD investments. In addition, our proprietary fintech provides access to extended government protection for all funds – even those above the $250,000 FDIC / NCUA limit.

When managing your organization’s cash, you need more than safety and a competitive return. You also need to partner with a company they you trust, and ADM is that company. Our team is our secret sauce, and you’ll understand that when you work with us. To speak with one of our knowledgeable, friendly cash management specialists, use the chat feature at the bottom of your screen or give us a call.

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*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.