CD Rates vs. Bond Rates – June Report

(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.

CDs are better than Bonds in Short-Term Based on Yield

Top yielding Short-term CDs, yielded far more than the average corporate bond. The 2-year CD rates 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.

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 more than the mentioned CD. Let’s call this a toss up.

10 Year Bonds Offer Superior Yields to 10 Year CD Rates

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.

Want really high yields?

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 Rates *                Average AA Rated Bond**
2 Years          1.25%                                                                0.76%
5 Year            1.80%                                                                1.76%
10 Year         2.25%                                                                3.06%

Find High Yielding CDs Here

* 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

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.

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