CDs Vs. Bonds – May Report

 

(May 11th, 2012) 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 higher yield, the answer is more complicated.

Below we compare the top yielding CDs to the average AA rated corporate 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 government insured CDs

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.

AA-Bond Yields in the 5-year Range Are Higher

AA-rated 5-year maturity bonds yielded 0.19% more than 5 Year CDs, 1.88% compared to 1.69% respectively.  However, we quoted the average AA-rated bond. There are many individual bonds that may yield substantially higher than the mentioned CD.

10-Year Bonds Offer Superior Yields to 10-Year CD

The average 10-year bond yielded almost 33% more than the 10-year CD with a yield of 3.00%. 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 Morgan Stanley (MS), Bank of America (BAC) and Goldman Sachs (GS).

Term Top       Yielding CD*         Average AA Rated Bond**

2 Years                1.20%                                      0.68%
5 Years                1.69%                                      1.88%
10 Years             2.25%                                      3.00%

* 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
Yields calculated as of May 10, 2012

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