CD v. T-bill yields

colgin · #1 08-08-2005, 05:34 PM

It has always been my understanding that for the same duration period, CDs from banks yield mpre than T-bills since while CDs are considered extremely safe, by definition Treasuries are safer as they are backed by the full faith and credit of the U.S. governemnt.

Today I looked at my local bank (Chase) for their CD ates and they were offering 2.8% (APY) for 3 months. (I know higher rates are out there but most are between 2.8 - 3.0% with some internet based banks being still higher.) The 3 month T-bill yield as of today closed at 3.33%. Why would I invest in the CD instead of the T-bill. I am sure I am missing something very obvious but would greatly appreciate it if someone could explain this to me.

Thanks.

Colgin

FishHooks · #2 08-08-2005, 05:43 PM

Just a thought, if your going to be getting that low of intrest, why dont you just put your money into an ING savings account. They have a min of 3.15% intrest, no fees and no minimum deposit and it is also FDIC insured. Just another option.

colgin · #3 08-08-2005, 05:47 PM

[ QUOTE ]
Just a thought, if your going to be getting that low of intrest, why dont you just put your money into an ING savings account. They have a min of 3.15% intrest, no fees and no minimum deposit and it is also FDIC insured. Just another option.

[/ QUOTE ]

Thanks for the advice. I actually do have an ING savongs account with my wife. I am looking into other short-term options, particularly snce i don't want to exceed the $100,000 FDIC insured amounts at any given institution (although that is me being smewhat nittish.)

One of the reasons I am interested in CDs v. T-bills is that I believe with CDs you are facing risks from the banks investing in mortgage-backed securities, which I think will look increasingly risky over the next 12 months or so.

FishHooks · #4 08-08-2005, 05:58 PM

From my understanding with intrest rates on the rise the intrest return on those CD's and T-bill should also rise as well. I dont know much about this subject but I think that's correct.

laserboy · #5 08-09-2005, 12:49 AM

I THINK you might be able to redeem the CDs at your bank before the 3 months are up at a discounted rate. This makes them slightly more liquid than the T-Bills, for which there isn't really a liquid secondary market.

The lesser interest rate is the cost for the additional liquidity.

Sniper · #6 08-09-2005, 02:22 AM

Why would you want to put 100K into such a low yielding instrument?

midas · #7 08-09-2005, 08:33 AM

Colgin:

In general, large banks like Chase offer the worst deals on everything from investments to checking acounts - they have huge overhead to cover and need to make a profit. Smart investors shop around and find the best rates with banks that have low overhead like internet banks and credit unions. Since CDs and savings acounts are FDIC insured you can shop around. BTW, FDIC is basically the same as a government guarantee.

adios · #8 08-09-2005, 05:16 PM

[ QUOTE ]
T-bills is that I believe with CDs you are facing risks from the banks investing in mortgage-backed securities, which I think will look increasingly risky over the next 12 months or so.

[/ QUOTE ]

And this implies why you have lower rates with CD's. Banks borrow short and lend long. When you buy CD's your lending money to the bank more or less. In order for the bank to make a profit by lending long there has to be a spread and the less the banks pay out in interest on the money it borrows from CD customers the more it makes on the money it lends. The site at bankrate.com has a potpouri of CD rates and durations. Mortgage backed securities come in all ratings from AAA on down. Not a bad idea to have your money insured though I will readily admit.