By coinnews 
00:00 Brad
If you’re looking for a low risk asset that offers reliable income, you may come across two common choices, CDs, certificates of deposit and Treasury bonds. They may look similar at face value, both offering predictable returns, but there are some key differences. Here to break those down, we’ve got Cooper Howard, who is the Schwab Center for Financial Research fixed income strategist. Good to have you here with us, Cooper. You wrote about five factors to decide whether you want to invest in a CD or treasuries, and they are security, yields, taxes, maturities, and liquidity. I want to start with security. What do you need to watch there?
00:55 Cooper Howard
Well, thank you very much for having me on, Brad. Um, I think that this is a good point to bring up because it kind of goes on one end of the spectrum of what to invest in. And I’d say on one end of the risk spectrum, just like you were talking about in your earlier segment, you kind of have cryptocurrency that tends to be very volatile, very risky on that side of things. And then on the other side of the spectrum is CDs and Treasuries. And the first point about that security, they do tend to be relatively conservative safe investments. And part of that conservative safe investment is the security behind it. So CDs, they are FDIC insured up to $250,000 per bank per depositor, whereas a US Treasury, it is backed by the full faith and credit of the US government. So if you’re an investor who’s investing beyond that $250,000 limit, then that’s something to consider a treasury. Now, the other thing to consider is that if you are below that $250,000 limit, then you can also consider CDs. However, that doesn’t just create the surface of it, you can also buy CDs from multiple different banks, Brad. So if you can, if you do have enough funds to go beyond that $250,000 FDIC insurance limits, then you may want to consider purchasing CDs from multiple different banks to spread that FDIC insurance limit out. So we generally suggest to be aware of that if you are getting near that threshold.
03:11 Brad
So we know another major consideration that you listed out is yields. How do the yields on CDs versus treasuries differ?
03:26 Cooper Howard
Yeah, this is a very good, interesting point because the CD market isn’t really a homogeneous market. So CD markets, there’s kind of two major buckets of CDs that I would like to identify, that I’d like to talk about. The first are going to be bank issued CDs, and that’s just like if I walk into my local bank or I pull it up online, and that’s a CD that’s directly issued by that bank. The other is going to be a brokered issue CD. So I’m biased, I work at Charles Schwab. If you open up a Charles Schwab account, then you can buy CDs through Schwab, whether it’s through your IRA or your brokerage account. And if we look at where yields are today right now, Brad, right now, a CD, a short-term CD, say maturing in less than one year, it yields a little bit less than a US Treasury. So if you’re looking for the highest yield, then under one year, right now where we’re looking at, that could consider a CD relative to a treasury. Beyond that, it tends to be that you’re getting a little bit more of a divergence in yields. So that’s another very important factor to consider.
05:05 Brad
Third in the decision tree here is how taxes between the two differ. How does that exactly influence the decision here?
05:20 Cooper Howard
Yeah, so I would say there’s also a 3A decision that needs to be factored into, and it’s what type of account are you investing in, because that is going to influence taxes. So if you’re investing in something like a tax sheltered account, like an IRA, tends to be that the investments that generate income or capital gains are sheltered from federal income taxes and state income taxes. So really the taxes question comes down to, are you investing in a taxable account like a brokerage account? Now, US Treasuries, they interest income that they pay is exempt from federal, from state income taxes, excuse me. So for investors who are in high state taxes, our high state tax, um, high tax states, excuse me there, say like California, New York, after considering the impact of state taxes, it could tip the scales in favor of one investment relative to the other. So because CDs are subject to both federal income taxes and state income taxes, that could take a little bit more of a bite out of your after tax income, rather than a Treasury, which is exempt from state income taxes. So again, that’s another factor that you need to consider, Brad.
07:03 Brad
And so next up here is maturities. Why does that matter?
07:11 Cooper Howard
You know, it matters because what we like to do is that at the beginning, the starting point of trying to determine, why are you investing, is to have a plan. So why are you investing in this investment? Um, a CD and a treasury, it is a loan to the US government or to that bank itself at the end of the day. So how long are you going to be loaning that money for? How long are you comfortable locking up your money for? So if it’s something that you need access to the funds in a very short period of time, we generally suggest investing in something that’s shorter maturity. If it’s something to where you say, I can lock it up for a longer period of time, or it’s part of an overall retirement strategy, maybe a longer term CD or a longer term treasury makes sense. Now, what that means in investing is that for CDs, they tend to be more short term. So the availability of CDs that are longer term is much less limited, much more limited than say US Treasuries. So if you are locking up funds for any longer period of times, tends to be that you’re going to have more options if you look at treasuries relative to CDs.
08:51 Brad
Last up, liquidity. What, what are the concerns there?
08:58 Cooper Howard
Yeah, so like I mentioned earlier, we do suggest that if you are looking at it, figure out why are you investing in this? How long are you comfortable locking up your money for? So let’s say that I have an investment that I’m comfortable locking it up for a year. Now, we know that maybe I plan on locking it up for a year, but there are certain circumstances where you might have to break that CD or sell out of that US Treasury or sell the CD prior to maturity. So situations change, your circumstances might differ than originally what you got into it as. And in terms of liquidity, the US Treasury market is a much more active liquid market. So it tends to be that if you had to sell that US Treasury prior to maturity, it’s a little bit easier to do so than to break a CD. And again, it goes back to the idea of, are you investing in a bank issued CD, or are you buying a brokered issued CD? So for brokered issue CDs, tends to be that we’ll go out and we’ll have to find another buyer through a brokerage firm that will purchase it from you.
10:25 Brad
Cooper, great to have you here with us. Thanks so much for joining.
10:29 Cooper Howard
Thank you, Brad.