(June 15ht, 2012) If your top concern is safety, there is no question that an FDIC insured CD is safer than any bond that is not directly backed by the government of the United States. However, if you are looking for more yield, the answer is more complicated.
Below we compare the top yielding CDs to the average AA rated bond to see which provided more yield. AA rated bonds are considered extremely safe. In fact, the US Government is rated by S&P at AA+, one notch above AA. We wanted a fair comparison: Super Safe Bonds compared to a government insured CD.
Top yielding Short-term CDs, yielded far more than the average corporate bond. The 2-year CD from Barclays/CIT Bank yielded 1.25 APY while 2-year AA-rated bonds yielded 0.76%, i.e. CDs yielded 0.49% more. On the face of it, this does not seem logical. However, it does make sense. The bank is using the CD as a method of mobilizing capital and gaining more customers. A high rate for relatively small period of time is relatively small cost for acquiring new client.
The difference between the bond and CD was about 0.04%. However, we quoted the average AA-Rated bond. There are many individual bonds that yield more than the mentioned CD. Let’s call this a toss up.
The average 10 year bond yielded almost 36% more than the 10 year CD with a yield of 3.06%. In this case, there is a structural reason why there is a big rate difference. Interest rates are almost always lower for shorter periods of time. Banks want to keep their cost of borrowing as low as possible and often don’t want to pay a big premium to clients investing for longer periods of time. On the other hand, corporations like the certainty of not having to go back into the market and frequently re-finance debt.
If you’re willing to hold investment grade debt that is AA- or A-rated, one/two notches below AA, there are a number of bonds with 10 year maturities that yield between 3 and 4% from companies such as JP Morgan Chase (JPM) and General Electric (GE).
Term Top Yielding CD* Average AA Rated Bond**
2 Years 1.25% 0.76%
5 Year 1.80% 1.76%
10 Year 2.25% 3.06%
* 2 Year CD, First listed CD on Bankrate under national offer (Barclays/CIT Bank), 5 year CD first listed under national on Bankrate offers (Barclays Bank), 10 Year, First listed CD on Money Rates (Discover bank)
** Composite Rates from Yahoo Finance
***Rates as of June 12, 2012