CD Rates Are Rising, But Treasurys Are Still The Better Investment

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  • Bank CD rates are finally climbing toward reasonable levels. How long has it been since we have seen 3% for a 3-year term?
  • But across most short-term maturities, U.S. Treasurys offer better yields, ultimate safety and freedom from state income taxes.
  • Bond funds are taking a hit as rates rise. Investing in U.S. Treasurys with a buy-and-hold strategy is a safer way to respond to rising risk.

I have been vacationing in Portugal for the last two weeks and was hearing only hints of the turmoil striking the U.S. bond market in recent days. The yield on the benchmark 10-year nominal Treasury, for example, jumped from 2.88% on September 6 to 3.23% at the market close on Friday, October 5.

That's a leap of 35 basis points, fairly remarkable in a month. I also noticed that the TIP ETF - which holds the full range of Treasury Inflation-Protected Securities - finally dipped below $110, which in the past I have considered a "buy" target. (I'm no longer so sure about that, because of distortions from the flat yield curve.)

Higher bond yields mean lower bond prices, and that's bad news for bond-fund investors. Here are the one-month results for bond ETFs holding medium-term Treasurys (down 1.0%), total bond market (down 1.5%), TIPS (down 1.8%), and long-term Treasurys (down 5.7%):

Bond ETF comparisonHowever, for buy-and-hold investors in bonds and bank CDs, higher yields may bring some happiness: Finally, we are seeing higher yields for our maturing investments. It has been a long time since we have been able to get even 3% for a safe, stable investment.

So I was wondering: Where are the buying opportunities out there? Are banks now going to step up - finally - with higher yields for insured accounts? Are nominal Treasury yields also reaching interesting levels?

My interest was perked by an email I received from a North Carolina-based credit union, Truliant Federal. It is offering a 37-month CD yielding 3.05% with a minimum investment of $1,000 of new money. This CD has a one-time "bump" option, meaning the rate can be increased one time - matched to the yield of Truliant's 36-month CD (currently a pathetic 1.55%). Another perk is that new money can be added to the CD throughout the term.

This article was written by

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I am no longer writing for this site. More details. I will continue to post updates at my site, Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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