Treasury bonds and certificates of deposit are two investment options you can use to diversify your portfolio. They are both similar in that they require you to put money into the investment and then leave it alone for a specified length of time. Aside from this, however, Treasury bonds and CDs are very different. Understanding how these two investment options compare can help you decide where to put your money.
A Treasury bond matures in 30 years. By comparison, CDs usually mature in 10 years or less, although some financial institutions provide CDs with longer periods. In general, this means that you are tying up your funds for a much longer period with a bond than a CD. For some people, this is advantageous because they don't have to address their investment as often, but others want to ensure that their funds are always as liquid as possible to accommodate changes in financial needs.
Most financial institutions and brokers require you to put at least $1,000 into a CD. With a Treasury bond, the minimum purchase is $100, the cost of a single bond. Treasury bonds thus sometimes are the better option for people who don't have a lot of money to invest.
Treasury bonds are exempt from local and state income tax. Comparatively, CDs are not exempt. This means the after-tax cost of a bond sometimes makes the bond a better deal. Additionally, interest on a Treasury bond is fixed and paid every six months until the bond matures. Interest on a CD may or may not be fixed, and although many banks pay biannually, banks can set their own terms for CDs and thus when interest is calculated and paid is highly variable.
If desired, you can sell both CDs and Treasury bonds before they mature. However, the market for CDs is not quite as large as the market for bonds, which makes it a little more of a risk in terms of finding a CD buyer. Because the value of the CD or bond essentially is whatever the market determines, you cannot guarantee that you will get all your money back when you sell a bond or CD early.
Treasury bonds are fairly simple in that they are essentially the same product for everyone. In contrast, because banks determine their own CD products and terms, CDs are much more variable and complex. This is good for customizing your investment to your needs, but it means you'll need to do more research to find the CD that is right for you.
Both CDs and bonds are backed or insured. The Federal Deposit Insurance Corporation (FDIC) backs bonds up to $250,000 per bank, as of the time of publication. This means that you'll need to use separate banks if you want to invest more than the insured amount. The United States Department of Treasury backs all bonds to the full face value. Bonds also are registered securities, so if you lose them or someone steals them, the Treasury can trace what happened and reissue the bonds.
Both Treasury bonds and CDs have penalties for early withdrawal. However, the penalty for bonds usually is set at no more than six months worth of interest. With a CD, the penalty minimum is seven days of simple interest on amounts withdrawn within the first six days of deposit. There is no maximum, so CDs are much riskier in terms of early cashout loss. In some cases, depending on the bank's guidelines, you actually can dig into the principal of the CD with the cashout penalty.
- U.S. Department of Treasury; Treasury Bonds in Depth; May 2011
- U.S. Securities and Exchange Commission; High-Yield CDs – Protect Your Money by Checking the Fine Print; December 2008
- Bankrate.com; Avoid Those Early Withdrawal Blues; August 2009
- TreasuryDirect.gov. "Series I Savings Bonds." Accessed Feb. 7, 2020.
- TreasuryDirect.gov. "Tax Considerations for I Bonds." Accessed Feb. 7, 2020.
- TreasuryDirect.gov. "Series I Savings Bonds FAQs." Accessed Feb. 7, 2020.
- TreasuryDirect.com. "Treasury Inflation-Protected Securities (TIPS)." Accessed Feb. 7, 2020.
Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website, Takingdictation.com, which functions globally and welcomes new clients.