CDs vs. T-Bills: What's the Better Investment Now? (2024)

FAQs

CDs vs. T-Bills: What's the Better Investment Now? ›

Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.

CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.

Pros and Cons

T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market.

CDs are paying higher rates than Treasury bills and Treasury notes for terms of one to five years. Treasuries are exempt from state income taxes, which is an important advantage when rates are nearly the same.

As a result, T-bills have interest rate risk meaning there is a risk that existing bondholders might lose out on higher rates in the future. Although T-bills have zero default risk, their returns are typically lower than corporate bonds and some certificates of deposit.

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

While longer-term CDs may tie up your funds for years, a 6-month CD allows you to access your money relatively quickly. If you suddenly need your $5,000 for an emergency or a more lucrative investment opportunity arises, you won't have to wait years to access your funds without incurring hefty penalties.

Should I invest in CD in 2024? ›

The bottom line

Overall, long-term CDs could be a good investment for those who want to lock in guaranteed returns at a relatively high rate in early 2024. But as the year progresses, if interest rates fall as expected, then long-term CDs could lose some of their appeal.

The drawback is that interest rates can change in the future, depending on the actions of the Federal Reserve. While CDs maintain a fixed interest rate, the interest rate you receive from a high-yield savings account could increase or decrease over time.

The takeaway. When deciding whether to invest in a CD or Treasury, you must consider your risk tolerance, liquidity needs, and investment horizon. Treasurys are a better choice for those who need more liquidity, have a longer investment horizon, and prefer the tax advantages.

Treasury bonds—also called T-bonds—are long-term debt obligations that mature in terms of 20 or 30 years. They're essentially the opposite of T-bills as they're the longest-term and typically the highest-yielding among T-bills, T-bonds, and Treasury notes.

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

Interest Rate Risk

When interest rates rise, the market value of debt securities tends to drop. This makes it difficult for the bond investor to sell a T-bond without losing on the investment.

Treasury performance through recessions

While recessions are challenging for investors, declining interest rates can be beneficial to the fixed income segment of a diversified investor's portfolio.

We spoke with two investment experts to find out. The short answer is bonds tend to be less volatile than stocks and often perform better during recessions than other financial assets.

Mr Phoon expects yields on six-month T-bills to stay at around 3.65 per cent to 3.85 per cent, while one-year T-bills will be around 3.5 per cent. Mr Wong from Bondsupermart is sticking to his forecast for the yields of six-month T-bills to range between 3.7 per cent and 3.9 per cent in 2024.