CD or Treasury? Five Factors to Consider

September 27, 2023 Cooper Howard
Certificates of deposit (CDs) and Treasuries both can offer steady, predictable investment income—but how to decide between them? Here are five factors to help you choose.

Two of the historically safest types of fixed income investments are certificates of deposit (CDs) and Treasury bonds. Both CDs and Treasuries can be a good choice when you want steady, predictable investment income—but how should an investor decide between them?

Before choosing CDs or Treasuries, we suggest you first start with your objectives. Not considering your objectives before investing is like taking a road trip and only being concerned about the tires on the car—not where you're going. The benefits of both CDs and Treasuries are that they can generate income, protect your principal, and help diversify your portfolio. Additionally, Treasuries can have tax benefits when compared to CDs. However, CDs and Treasuries are fixed income investments and subject to similar risks as other fixed income investments. For example, if interest rates rise, the price of a CD or Treasury will fall and if you need the investment prior to maturity and have to sell it, you may lose money.

When considering between the two investment options, there are five factors that investors should consider.

1. Security: Both CDs and Treasuries are very high-quality investments. CDs are bank deposits that pay a stated amount of interest for a specified period of time and promise to return your money on a specific date. They are federally insured and issued by banks and savings-and-loans institutions. CDs are backed by FDIC insurance up to $250,000 per bank per depositor. There are bank-issued CDs and brokered CDs. The two are similar but have some important differences.

You can purchase multiple CDs from different banks while still holding them in the same account type to protect more than $250,000. For example, if you own two CDs in your brokerage account, $250,000 from one bank and $250,000 from a second bank, and you have no other deposits at those banks, you're covered for $500,000 even though they’re held in the same account. We suggest that if you're investing more than $250,000 in CDs, be sure that you're not exceeding the FDIC insurance limits at each individual bank.

Treasuries, on the other hand, are issued by the U.S. Department of the Treasury and are backed by the full faith and credit of the U.S. government to an unlimited amount. Like CDs, they pay a stated amount of interest for a specified period of time and promise to return your money on a specific date. There's generally ample availability of Treasury bonds, whereas the availability of CDs can be limited and depends on the bank's capital needs and other factors. Therefore, there can be instances where there aren't enough CDs to insure an amount greater than the $250,000 FDIC insurance limits. In these instances, Treasuries could be the more appropriate option.

2. Yields: Yields, as represented by the 10-year U.S. Treasury, are near the highest levels in roughly 15 years,1 making both CDs and Treasuries a much more attractive option than in prior years. Currently, Treasuries maturing in less than a year yield about the same as a CD.2 Therefore, all things considered, it likely makes more sense to choose Treasuries over CDs, depending on your situation, because of the tax benefits and liquidity when considering very short-term maturities.

Treasuries relative to CD yields

Chart shows the before-tax yield for a Treasury vs. a CD with maturities in three months, six months, two years, three years and five years. Treasuries yield more than CDs for three-month and six-month maturities.

Source: Bloomberg for Treasury yields and Schwab BondSource ™ for CD yields, as of 9/26/2023.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. CDs were chosen because they were the highest yielding, new issue CD for each maturity, based on a $25,000 purchase amount. New issue CDs have a selling concession that varies. Secondary CDs may have a transaction fee. CDs may not be available in all states and the availability of CD inventory may change. Treasury securities were chosen because they are on the run Treasuries; "on the run" means the most recently issued U.S. Treasury bonds or notes of a particular maturity. USGG3M Govt for 3-month Treasury, USGG6M Govt for 6-month Treasury, USGG12M for 12-month Treasury, GT2 Govt for 2-year Treasury, GT3 Govt for 3-year Treasury, and GT5 Govt for 5-year Treasury.  Past performance is no guarantee of future results. 

3. Taxes: Treasuries can offer tax benefits that CDs do not. Treasuries are exempt from state income taxes, whereas CDs are subject to both federal and state income taxes. As a result, investors who are choosing between the two options should start with what account type they are investing in, and then consider what their state tax rate is. If investing in a tax-sheltered account, like an individual retirement account (IRA) or a 401(k), the tax benefits that Treasuries provide disappear, because earnings in these types of accounts are not subject to income taxes.

However, if investing in a taxable account, like a brokerage account, the impact of state income taxes can tip the scales one way or the other. For investors in high-tax states, like New York or California, after considering the impact of state taxes, investors may be able to achieve a higher after-tax yield with Treasuries.

For example, assume a two-year CD currently yields 5.35%, compared to a two-year Treasury that yields 5.12%.1 For an investor in the top tax bracket in California, which has a 13.3% state tax rate, after the impact of taxes, the CD yields 2.46%. In this instance, the investor can achieve a higher after-tax yield with the Treasury versus the CD.

For investors in other states, it takes a roughly 4%-6% state tax rate for a CD that matures between two and five years to equal the yield on a Treasury of similar maturity.

Investors in high-tax states may want to consider Treasuries over CDs due to their tax benefits

Chart shows a map of the 50 states in colors based on their state income tax rate, from no state income tax to states with income tax of 10% or more.

Tax Foundation, as of 2/21/2023.

4. Maturities: Treasuries have maturities ranging from as little as four weeks to as long as 30 years. In fact, between 2023 and 2053, the only years where a Treasury is not available is 2034 and 2035. On the other hand, the availability of CDs beyond five years is limited in many instances. For investors that desire a greater selection of maturities, Treasuries can make more sense. 

5. Liquidity: We usually recommend holding a CD or Treasury to maturity, but situations can arise where an investor needs to "break" a CD or Treasury prior to maturity. Unlike CDs purchased directly from a bank, brokered issued CDs are bought and sold on a secondary market. If you need access to the funds you invested in a CD prior to maturity, Schwab can help you sell the CD at the current market rate by requesting bids on your CD and contacting you with the highest one. If you decide to sell, you'll receive the bid price plus any accrued interest. There are no guarantees that you'll get what you originally paid for the CD and there may be a fee to sell the CD.3

Treasuries can also be bought and sold on a secondary market; however, it's a much more active market than the CD market, which means there are tighter bid/ask spreads. A Treasury investor could still lose money if they had to sell a Treasury prior to maturity, but the Treasury market is a much more liquid market than the CD market and therefore much easier to sell if needed.

We generally suggest that if there's the possibility that you may need the money prior to maturity, consider Treasuries over CDs because they're more liquid.

What to consider

One strategy to consider when investing in CDs or Treasuries is a ladder. A ladder is a portfolio of individual Treasuries or CDs that mature on different dates. This can help minimize exposure to interest rate fluctuations. Additionally, investors may want to consider a separately managed account (SMA) that can help build and manage a ladder. For help selecting investments for your particular situation, reach out to a Schwab representative.

1 SchwabBond Source and Bloomberg as of 9/26/2023.

2 Based on the highest yielding new issue CD available on Schwab BondSource™ as of 9/26/23 for 3-month, 6-month, and 12-month maturities compared to USGG3M Govt for 3-month Treasuries, USGG6M Govt for 6-month Treasuries, USGG12M for 12-month Treasuries.

3 New-issue CDs have a selling concession which can vary by maturity/term. Secondary CDs may have a transaction fee.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Past performance is no guarantee of future results.

Investing involves risk including loss of principal.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio.  As compared to other fixed income products and strategies, engaging in a bond ladder strategy may potentially result in future reinvestment at lower interest rates and may necessitate higher minimum investments to maintain cost-effectiveness. Evaluate whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance and financial circumstances.

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.

Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio.

Supporting documentation for any claims or statistical information is available upon request.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.