CD or Treasury? 5 Factors to Consider

Both CDs and Treasuries are very high-quality investments and backed by some form of a guarantee. 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, principal and interest. 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.

Yields, as represented by the 10-year U.S. Treasury, have mostly been in a range since October 2024 but are still elevated relative to the past 15 years,¹ making both CDs and Treasuries a much more attractive option than in prior years. Currently, CDs maturing in a year or less yield somewhat more than Treasuries. However, at maturities beyond one year, Treasuries yield slightly more before taxes.² Therefore, all things considered, it might make more sense to choose CDs over Treasuries for shorter-term investments, but it depends on your situation. It's also important to note that yields change over time so this relationship may not always hold.

Treasuries can offer tax benefits that CDs do not. Income from 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 factor in what account type they are investing in, and also 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 don't apply, 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 one-year CD currently yields 3.95%, compared to a one-year Treasury that yields 3.82%.¹ For an investor in the top tax bracket in California, which has a 13.3% state tax rate, after the impact of state taxes, the CD yields 3.42%. In this instance, the investor can achieve a higher after-tax yield with the Treasury versus the CD.

Treasuries have maturities ranging from as little as four weeks to as long as 30 years. 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.

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 CDs are bought and sold on a secondary market. If you need access to the funds you invested in a CD prior to maturity, you may be able to sell the CD at the current market rate by requesting bids on your CD through your broker. 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 more availability of quotes which generally lead to 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.

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.