“I see lots of talk in the media about CDs and money-market funds. But in my experience Treasury bills often have better rates, while offering the same government guarantee. How do these products really stack up?”
—Jeff Wallace, Boulder, Colo.
Your question is timely: Yields on CDs and money-market funds are especially attractive right now. And yes, T-bills typically do pay a little more—but not always. “In general your reader is right,” says Chris Gunster, head of fixed-income strategies at Fidelis Capital, a wealth-management firm in Tampa, Fla. “Although you might find exceptions if you shop around.”
As it turns out, there are exceptions right now. While six-month Treasurys were recently yielding 5.5%, the best six-month CDs slightly exceed that amount. Meanwhile, the top-yielding money-market mutual funds yielded between 5.1% and 5.2%. While being picky can pay off by fractions of a percentage point, the big picture is that there are now multiple ways to keep your cash a step ahead of the 3.7% inflation rate. Until this year, interest rates had generally trailed inflation, meaning your safely invested cash was continually losing buying power. “Real rates, which are rates after you’ve adjusted for inflation, are the highest we’ve seen in a very long time,” says Gunster.
Choosing your investment
Yields aren’t the only consideration when choosing among T-bills, CDs and money-market funds. While all are considered exceptionally safe, CDs can’t be liquidated early without triggering an early-withdrawal penalty. Money-market funds might pay a little less, but they are the rare mutual fund designed so that their share price almost never changes. And T-bills’ value can fluctuate unless you hold them to maturity.
Treasury securities are essentially interest-bearing IOUs issued by the U.S. government to raise funds. Short-term Treasurys—those that mature in a year or less—are known as Treasury bills, while those with longer-dated maturities are known as Treasury bonds. They’re backed by the full faith and credit of the United States. CDs are banks’ way of raising funds that they can then lend out at higher interest rates to home buyers and others. They’re insured by the Federal Deposit Insurance Corp, up to $250,000 per bank per depositor. Money-market mutual funds invest in short-term, low-risk securities like Treasurys and commercial bonds. They aim for stability and liquidity.
What T-bills, money markets and CDs are yielding
The yields of all three investments are related to the benchmark federal-funds rate, which is set by the Federal Reserve. Today’s strong yields are the result of the Fed’s 18-month-long campaign to throttle inflation by raising interest rates. The fed-funds rate stands at about 5.3%, a level not seen since 2007.
The yields of Treasurys can be higher or lower than the fed-funds rate based on the bonds’ maturities, supply-and-demand dynamics and other factors. Right now, Treasurys with maturities of up to a year are yielding more than 5%, while longer-dated bonds are all in the 4% to 5% range. Money-market mutual funds, while they tend to have significant Treasury bondholdings, tend to yield less because of fund-management fees.
More Reader Questions
Bank CD yields, meanwhile, are all over the lot. Banks that badly need to borrow money pay more, while those that are flush with cash pay less. The average rate for CDs of a year or less maturity is below 2%. While most well-known bricks-and-mortar banks are paying measly yields, smaller banks and online ones are dangling more attractive rates. For example, USAlliance Financial, in Rye, N.Y., is offering a “special rate” of 5.75% for its six-month CD. BluPeak Credit Union, in San Diego, offers the same rate for a nine-month CD.
Buyer beware: With offers like these, the bank or credit union rolls your money into a regular-rate (read lower) CD at maturity unless you actively withdraw the funds. “That seems to be a common tactic that banks are using,” says Ken Tumin, founder of Deposit Accounts, a site that tracks savings accounts and CDs. “Savers can make use of it but they have to be prepared to move the money when the CDs mature.”
How to buy treasuries
It’s up to you to decide if shopping around is worth the trouble, including reading the fine print. If you’re interested in going the Treasury route, don’t be intimidated, says Gunster. Many do-it-yourself investors assume that buying individual Treasury bonds is the province of professionals. “I think investors look at T-bills and say, ‘Oh, I can’t do that, I don’t know how,’” says Gunster. “You can, and it’s easy.”
T-bills can be bought and sold through a brokerage account—Treasurys now trade commission-free on many online brokerages. They can also be bought through the government website TreasuryDirect.gov. If you want to sell Treasurys before they mature, you can easily do so via your brokerage account (keep in mind that the offering price may have changed from the price you paid). If you bought through TreasuryDirect, you’ll have to transfer your T-bills to a brokerage account first.
Got a money question? Let Buy Side find the answer.Emailmoney@buysidewsj.com.
Include your full name and location, and we may publish your response.
The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.
