Currently rates on Certificate of Deposits (CDs) are close to those of U.S. Treasury bonds, so why own bonds that fluctuate in price daily versus owning a CD from your local bank? Let’s take a look:
If you live in a place that has few banking choices you are likely going to have less competitive rates on the CDs offered by your local banking institution than those that can be found easily by searching current bond offerings on your online broker. Even if you visit a site like Bankrate.com to look for the highest yielding CD available, after it matures you’re might have to move it to another bank to get a higher yield in the future.
If you don’t hold a CD to maturity, you will have to pay a penalty to gain early access to your money. However, with a U.S. Treasury bond you can sell into a liquid market at any time. You may lose money if there has been a change in market interest rates, but in shorter-term bond maturities, the price movements are generally negligible and most online brokers don’t charge any fees to buy and sell U.S. Treasury bonds.
U.S. Treasury bond interest is exempt from state taxes, whereas CD interest is fully taxable at the state level.
If interest rates rise you may be locked into a lower yielding CD, but with bonds you can sell and reinvest in different rates and maturities to take advantage of rising rates. Conversely, if interest rates fall, bonds become more valuable and you can sell at market prices possibly realizing a capital gain.