U.S. Treasury Bonds Vs. CDs

Banks and credit unions sell CDs that have terms ranging from a few days to several years. When interest rates drop, banks lower the rates paid on newly issued CDs. For this reason, banks don't usually sell CDs with terms much longer than five years, because banks don't want to be on the hook to pay higher-than-average rates for years to come if interest rates suddenly drop.

In contrast, the U.S. treasury issues bonds that have a duration of 30 years. Unlike CDs, though, many treasury bonds have variable rates, so the government isn't making any promises about how much money you'll earn.

Borrowers with good credit can get access to loans more easily than borrowers with poor credit. In the investment world, the U.S. government is seen as the most creditworthy borrower because it controls the nation and can raise taxes or cut programs if it runs short of cash. Bondholders are creditors of the government, and this means rates paid on treasury bonds are lower than rates on other investments, such as CDs.

Within the banking arena, financially strong banks pay lower rates for CDs than banks that are struggling. Credit unions usually pay better rates than banks, because these institutions are not-for-profit entities, and tax savings are passed on to CD customers in the form of higher rates.

Over the course of time, low-yield investments often fail to keep pace with inflation. This means you lose spending power, because prices for goods are rising more quickly than the value of your investment. Investors refer to this danger as inflation risk, and it's more of an issue with low-yield, low-risk treasury bonds than higher-yield CDs.

On the other side of the equation, while the CDs in banks and credit unions are federally insured, the insurance coverage only extends to $250,000 per account holder. If your bank goes bust and you've got more than $250,000, you stand to lose some of your money. Treasury bonds aren't insured, but these instruments are issued by the same federal government that you're relying on to partially protect your CDs.

Some treasury bonds are marketable, which means you can sell these bonds through investment brokers before the end of the bond term. Other bonds, such as the EE and I savings bonds that you can buy through banks, are not marketable. You can't sell EE and I bonds, but you can redeem bonds that you've owned for at least one year. If you cash in bonds within five years of the purchase date, then you lose three months of interest. Most banks and credit unions assess penalties on premature redemptions of CDs. Penalties vary but can deplete both your interest and your principal.