Treasuries vs CDs in high-cost state - no brainer?

[JohnnyBGoode]

Hi All -

I have a good portion of my "fixed income" portion of my overall 75/25 Asset Allocation invested in CDs, which have offered a nice return over the last several years. About $500K of them are coming due over the next 8 weeks or so, and I have to decide what to do with the money. The CDs are at Ally Bank, which I like because the CD rates are competitive and the website is stellar. However, as we know, CD rates are falling/flat, and everything is pretty much 4% or less.

We have all our other assets managed at Fidelity. I was looking at the yields on different fixed-income investments and it seems like Treasuries offered through Fidelity would be a good option. Not only are the returns slightly better than CDs, but living in CA, the fact they aren't subject to state income tax is a bonus. I'm thinking of purchasing some at various maturities from 1 to 5 years. This approach seems as safe as an FDIC-insured CD and the net return will be better. Am I missing anything?

Note - We have a healthy cash reserve and don't expect I will need the money over the next 5 years.

Thanks!

 

[jim584672]

Treasuries have been higher than most CDs, and state tax free. CDs make no sense, especially in a high tax state. They would have to have much higher yields for them to make sense.

 

[Sunset]

We are doing that too.
In IL the State tax is ~5% but not on Treasuries.
So, a CD would have to pay at least 0.25% more than treasuries to be equal, in the end.

Treasuries are (so far in history) as safe or safer than FDIC.

 

[Koolau]

How do treasuries compare to CDs if one needs the money early? Most CDs have a penalty of the last 90 days or maybe 180 days interest IIRC. I've only had to do that once, but it was easy and not too onerous, interest-loss wise.

 

[JohnnyBGoode]

How do treasuries compare to CDs if one needs the money early? Most CDs have a penalty of the last 90 days or maybe 180 days interest IIRC. I've only had to do that once, but it was easy and not too onerous, interest-loss wise.

From what I can tell on these secondary market platforms like Fidelity, I could just sell it if needed. I might lose a bit of money, but I doubt it would be much.

 

[Koolau]

From what I can tell on these secondary market platforms like Fidelity, I could just sell it if needed. I might lose a bit of money, but I doubt it would be much.

Thanks, that makes sense. I sorta forgot that there is an open market for treasuries. I was thinking about dealing with the Treasury.

 

[wolf]

Treasuries are supposedly very liquid. But the principle/price you receive if selling before maturity will depend on the current "interest rate".
Where a non-broker CD, your principle is fixed. Just the penalties will vary.

FYI. Treasury/Agency, callable, bonds. Covered on this site. If you have the time. No state tax. Better yields.
But you have to know what you are doing.

Also, a California resident.

 

[jim584672]

The issue with selling before maturity is the interest gets reported as a capital gain and not interest. Capital gains are not state tax free, so you have to determine what the sale price represents, a certain percentage might be a gain or loss due to a change in interest rates, and the other part is actual interest. Makes taxes way more complicated.

 

[Chuckanut]

It's all about the total return after taxes at maturity when comparing CDs to Treasuries. Risk on either is basically zero.

A while back when one year treasuries were in the mid 4% area I managed to grab a 5.15% CD. Is that enough to make it a better deal? Depends on the your state's tax brackets. As they say, YMMV.

 

[Gumby]

Except for I-Bonds, I have never bought directly from the US Treasury, and I don't buy CDs directly from a bank either. I just buy on the secondary market through Vanguard.

My formula for comparing yields is simply to gross up the treasury yield by my marginal state tax rate. So, if my state tax rate is 6% and I can get a 1 year treasury at 4.1%, then a state-taxed CD must be over 4.36% to be superior on an after tax basis : 4.1/(1-.06) = 4.36 As long as I stay below the FDIC limit, the risk is the same.

And, while I buy on the secondary market, I hold to maturity.

 

[JohnnyBGoode]

Yes, I plan to hold to maturity to avoid the cap gains issue. I've done a few I-Bond purchases directly from the Treasury, but the website was convoluted enough to be annoying. I'm used to the Fidelity site and processes of buying/selling, and it is worth it for me to lose a bit on the margin to easily figure out what's going on.

 

[pb4uski]

How do treasuries compare to CDs if one needs the money early? Most CDs have a penalty of the last 90 days or maybe 180 days interest IIRC. I've only had to do that once, but it was easy and not too onerous, interest-loss wise.

The CDs that have an x day early withdrawal enalty are bank CDs. Brokerage CDs can't be redeemed with the issuer prior to maturity like bank CDs can, but they can be converted to cash by selling them in the open market. BTW, IME brokerage CDs are generally not as liquid as Treasuries... there isn't as robust a market for them but there is a market. Depending on what market interest rates have done since you bought the brokerage CD, you may have a loss on sale or a gain. If a loss, it may or may not be less than what an early withdrawal penalty on a bank CD would have been.

 

[SnowballCamper]

In my Schwab account I see brokered CDs over one year consistently get about a quarter % more than treasuries.

 

[Koolau]

The CDs that have an x day early withdrawal enalty are bank CDs. Brokerage CDs can't be redeemed with the issuer prior to maturity like bank CDs can, but they can be converted to cash by selling them in the open market. BTW, IME brokerage CDs are generally not as liquid as Treasuries... there isn't as robust a market for them but there is a market. Depending on what market interest rates have done since you bought the brokerage CD, you may have a loss on sale or a gain. If a loss, it may or may not be less than what an early withdrawal penalty on a bank CD would have been.

Thanks. I was thinking about bank CDs and didn't realize one could sell CDs in the open market. Good to know. Again, thanks.

 

[GenXguy]

In my Schwab account I see brokered CDs over one year consistently get about a quarter % more than treasuries.

But are they callable?

 

[jazz4cash]

In my Schwab account I see brokered CDs over one year consistently get about a quarter % more than treasuries.

Are the CDs callable? At Fidelity I see 5yr rates of 4.6 for a CD and 4.28 for the treasury. That’s 32bps but that CD is callable. The highest non callable CD is 4.25 so the treasury is 3 bps higher, more liquid and state tax free.

 

[sdawson]

We are doing that too.
In IL the State tax is ~5% but not on Treasuries.
So, a CD would have to pay at least 0.25% more than treasuries to be equal, in the end.

Treasuries are (so far in history) as safe or safer than FDIC.

For comparison, in Oregon, state income tax is 9.9%. No sales tax though.

 

[RetMD21]

I prefer munis

 

[SnowballCamper]

But are they callable?

Yes, they are, on a date certain as I recall. But still give the yield up to that time. If you're holding longer term for income in a state with income tax, then Treasuries are probably the way to go if you want the interest for income. Most of my bond holdings are short term treasury at the moment, but I picked up a couple of the CDs to see what happens (see if they get called).

 

[jazz4cash]

Yes, they are, on a date certain as I recall. But still give the yield up to that time. If you're holding longer term for income in a state with income tax, then Treasuries are probably the way to go if you want the interest for income. Most of my bond holdings are short term treasury at the moment, but I picked up a couple of the CDs to see what happens (see if they get called).

Comparing callable CD rate to non callable treasury seems like apples and oranges especially when you can compare to a non callable CD. The difference is the “cost” of the call protection.

 

[Healthy Lifestyle]

Is an ETF like SGOV exempt from state taxes if you have an HSA account?

 

[SnowballCamper]

Comparing callable CD rate to non callable treasury seems like apples and oranges especially when you can compare to a non callable CD. The difference is the “cost” of the call protection.

Mine are all under two year maturities. Both are backed by government (ok, technically not the CD interest, but it's at JP Morgan). So since I'm on the hunt for yield, they're pretty much the same to me. If the CD gets called then I just roll it into whatever gets the best yield then.

 

[jazz4cash]

Is an ETF like SGOV exempt from state taxes if you have an HSA account?

I dunno but a quick goole search says yes it is exempt. Account type shouldn’t make any difference, right? Did you get 1099?

 

[Drake3287]

And if you're still looking at CD's, Synchrony has plenty of them over 4%. Currently 4.35 APR for a 13 month.