CDs Rates Beat Bonds in the Short TermApril 13th, 2012 by David Waring
Where should you put your money in a bond or CD? If your top concern is safety, there is no question that an FDIC insured CD is safer than any bond which 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 compared 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.
CDs are better Than Corporate Bonds in Short-Term Based on Yield
Top yielding Short-term CDs yielded far more than the average Corporate Bonds. The 2 year CD from CIT Bank yielded 0.44% 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 gaining more customers. A high rate for relatively small period of time is relatively small cost for acquiring new client.
Yields in the 5-year Range Tie
The difference between bonds and CDs is negative 0.08%, i.e. AA-rated Corporate Bonds are yielding more than bank CDs. However, we quoted the average AA-Rated bond. There are many individual bonds that may yield substantially higher than the mentioned CD. Let’s call this a toss up.
10-Year Corporate Bonds Offer Superior Yields To 10-Year CDs
The average 10 year bond yielded almost 44% more than the 10 year CD with a yield of 3.25%. 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 money 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.
Want really high yields?
If you’re willing to hold investment grade debt that is A-rated, one notch below AA, there are a number of bonds with 10 year maturities that yield between 4 and 5% from companies such as JP Morgan Chase (JPM) and General Electric (GE).
|Term||Top Yielding CD*||Average AA Rated Bond**|
* 2 Year CD, First listed CD on Bankrate under national offer (CIT Bank), 5 year CD first listed under national on Bankrate offers (Ally Bank), 10 Year, First listed CD on Money Rates (Discover bank)
** Composite Rates From Yahoo Finance