CD or Treasury? Five Factors to Consider

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

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 4.80%. 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

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.

Will Rising Federal Debt Slow Economic Growth?

Over the past 70 years, rising government debt generally has been accompanied by weaker economic activity. But it’s not a simple relationship.

There is always a lot of controversy around the implications of high government debt. Over the past 70 years, high (and rising) government debt has generally been accompanied by weaker economic activity. The cause and effect can be debated, and there is also a bit of a chicken-and-egg, or “circular” argument: High and rising debt is a burden on growth, but low levels of growth also trigger an increase in government spending, higher budget deficits and higher debt.

In other words, one argument holds that a high and rising burden of debt crimps economic growth due to the “crowding-out” effect (that is, servicing the debt crowds out more productive spending and/or investments). A competing argument is that economic growth generally has been slowing over the past several decades—driven by demographics, globalization/competition, technology/innovation, and low inflation—which has led to increased government spending to try to boost growth, thereby increasing the deficit and, in turn, debt levels. The chart below represents the broadest measure of government debt, including federal government debt, state and local debt, and government-sponsored enterprise (GSE) debt (e.g., Fannie Mae and Freddie Mac). Courtesy of the strength of the economic rebound coming out of the lockdown phase of the pandemic—at the federal, state and local levels—government debt as a percentage of gross domestic product (GDP) has moved lower, which is good news (at least in relative terms).

Gov’t debt high, but falling

Annualized Gain (12/31/1951-6/30/2023)

Government debt/GDPNominal GDPReal GDPNonfarm payrollCPI inflationReal non-residential investment
Above 105%4.4%2.0%0.9%2.5%3.6%
75% to 105 %5.4%3.2%1.6%2.4%4.7%
75% and below8.9%3.6%2.5%5.7%10.4%


Is rising debt inflationary?

Although it’s not supported by any historical data, there is an elevated concern expressed about high debt and whether it, in and of itself, leads to serious and persistent inflation. The visual below looks at every decade since the 1970s—each color-coded. It shows the relationship between debt as a percentage of gross domestic product (GDP) and the inflation rate, as measured by the core personal consumption expenditures (PCE) measure (which is the Federal Reserve’s preferred metric). As shown, as debt growth expanded as a share of GDP, inflation moved lower, not higher. There is a more recent debate about how much of the past year’s inflation surge is due largely to COVID-19-specific supply/demand dislocations vs. the blow-out of the budget deficit as fiscal stimulus ramped up to ease the strains of the COVID recession. The answer is probably both.

Debt vs. inflation

Source: Charles Schwab, Bloomberg, as of 6/30/2023.

Looking back, the United States’ “net national savings” rate was relatively high coming out of World War II, but the United States had to finance itself internally after the war, given that Europe and Japan were all in dire financial straits. The difference today is that those and other countries have been more than willing to buy U.S. debt. In addition, the cost of servicing debt is currently historically low, so the Federal Reserve’s role in “financing U.S. debt” is occurring at a very low cost (even if there are unintended negative consequences). However, as shown below, even though net interest payments are low for now, they have started to accelerate and are expected to continue their upward trend.

Interest payments low for now

Source: Charles Schwab, CBO (Congressional Budget Office): The Budget and Economic Outlook: 2023 to 2033 (5/12/2023).

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

Based on estimates from the Congressional Budget Office (CBO), the projected growth rate in government spending on interest payments over the next decade will swamp the growth rate of other spending categories.

Interest payments’ high growth

Source: Charles Schwab, CBO (Congressional Budget Office): The Budget and Economic Outlook: 2023 to 2033 (5/12/2023).

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

More debt is unlikely to generate greater economic growth

Even under any future dire assumptions of the growth rate of net interest payments, we believe there is little risk of a U.S. debt default. In the meantime, there is generally an agreed-upon set of ways government can reduce its debt burden. One way, which the United States has been employing since the pandemic erupted is typically referred to as “financial repression”—involving keeping interest rates extremely low, which keeps real yields in negative territory. This force is not yet in the rear-view mirror, but the Federal Reserve has, of course, aggressively raised interest rates over the past year.

Another way is for the government to reduce spending and/or increase taxes. Thanks to the removal of much of the pandemic-related direct fiscal stimulus, and the beneficial impact on tax receipts courtesy of the strong economic recovery coming out of the lockdowns, both are working in favor of bringing down the rate of debt growth. Finally, the government can also try to boost growth and inflation, such that the denominator (GDP) is growing faster than the numerator (debt). That was exactly what happened in the late 1940s, just after WWII. Today, however, inflation is growing much faster than the economy, as well as faster than wage and income growth.

What we do know now is that as the debt ratio was soaring, each additional dollar of debt lead to significantly less than a dollar’s worth of economic growth. This is referred to as the “credit multiplier” or “money multiplier.” More debt is unlikely to generate greater economic growth, other than perhaps for a short span of time. As noted earlier, the weight of debt also represents a weight on economic growth. For all the cheering of the June 2009 to February 2020 expansion being the longest on record, it was also the weakest on record, as shown below. 

Prior post-WWII economic expansion long, but weak

Source: Charles Schwab, Bloomberg, Bureau of Economic Analysis, as of 6/30/2023.

A key to durable economic growth likely will require a continued move down in government debt ratios, which could trigger an expansion in the aforementioned credit multiplier. 

Weekly Market Outlook

Chief Global Investment Strategist Jeffrey Kleintop’s 90-second take on the markets for the week ahead.

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. 

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, business, and other conditions.  

Past performance is no guarantee of future results. 

Investing involves risk including loss of principal. 

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. 

Investing in emerging markets may accentuate these risks. 

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party. (2310)

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