Scott Burns has written quite a few articles about CD and Bond ladders that I like.
Go to
Dallas Morning News | News for Dallas, Texas | Scott Burns: Columns 2007 (free registration required) then down the page along the right side under
Readers and Reports click the
Yield Ladders link.
Personally, I keep less than a year in a MM, about a year in a short-term bond fund, and for the balance of my non-equity investments I use a 5 year Treasury ladder, with bonds (usually TIPS) acquired once a year at original issue, and ideally held to maturity.
The advantages of treasury bonds over a CD ladder include:
- When fear, uncertainty, and doubt descend on the world markets, the value of my treasury bonds go up, just like they have done recently.
- If for some reason I need my cash back early, I figure I have at least a 50/50 chance of being able to sell my bonds for a profit. Either point #1 applies, or the stock market is doing well and I can sell stocks instead of bonds! With CD's, there is always a penalty for early withdrawal. You never win.
- No state income taxes on treasuries.
- Rock bottom expenses. (None if held to maturity.)
- Even less liquidity risk than an FDIC insured account.
- Unlike bond funds, individual bonds have a maturity date.
- Unlike bond funds, no unexpected capital gain distributions.
Bond funds do have some advantages, which is why I have some money in bond funds.
- Bond funds are very useful for small dollar amount transactions.
- Bond funds are useful for modest account balances.
- Bond funds are a great way to play with risky bonds which require diversification.
Unfortunately, bond funds usually have difficulty overcoming their many expenses on a risk and tax treatment adjusted basis compared to individual treasury bonds.
It is certainly true that from time to time the news is full of "bond yields fell today as traders rushed into the safe haven of treasuries." When that happens, CD yields will temporarily be more attractive than bond yields. However, most of the time I find the best deals at treasury auctions.
I have never purchased a savings bond, though I wish I had done so back when the I-bonds were yielding a wonderfully huge premium on top of inflation. At current levels, they just don't seem very attractive.