CD Yields Continue to Beat Bond Yields in the Short Term

(March 2012) CD Yields vs Bond Yields Report


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 a little 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 Bonds in Short-Term Based on Yield

Top yielding Short-term CDs, yielded far more than the average Bond. The 2 year CD from CIT Bank yielded 0.52% 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 Are Very Close

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 very close or even more than the mentioned CD. Let’s call this a toss up.


10 Year Bonds Offer Superior Yields to 10 Year CD

The average 10 year bond yielded almost 32% more than the 10 year CD with a yield of 3.28%. 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.


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 Years      1.26%   0.74%
5 Years      1.74%   1.70%
10 Year      2.25%   3.29%

Corporate bond yields have gone up across all maturities compared to last month while CD rate yields have remained unchanged in the two and five-year categories. This indicates banks do not expect the Fed to increase rates in the short-term. However, a rise in corporate yields indicates big businesses are struggling to raise debt. There can be various reasons for this including unwillingness on the part of the banks to offer credits to companies. Businesses with substantial exposure in Europe may find it difficult to raise new capital due to the ongoing debt crisis.

* 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

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