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This is Marc Prosser from Learnbonds. I have a big question to answer. Which pays more
CDs or Bonds? The obvious answer would be bonds. Bonds should pay more than CD’s.
But when you look at the evidence that is not necessarily true.
Here you can see the top yielding CDs and how they compare to yields on the average
AA rated bond of the same maturity. AA rated bonds are considered extremely safe. In fact,
the US Government is rated by S&P at double A plus, one notch above double A.
We wanted a fair comparison: Super Safe Bonds compared to a government insured CD, and here
is what we found.
CDs are better Than Bonds in the Short-Term Based on Yield
Top yielding Short-term CDs, yielded far more than the average Bond. The 2 year CD from
CIT Bank yielded 0.57% more. On the face of it, this does not seem logical. However, it
does make sense. The bank is using the CD as a method of gaining more customers. A high
rate for relatively small period of time is relatively small cost for acquiring new client.
Yields in the 5 year Range Are Very Close
The difference between the bond and CD was less than 0.14%. However, we quoted the average
AA Rated bond. There are many individual bonds that yield very close or even more than the
mentioned CD. Lets call this a toss up.
10 Year Bonds Offer Superior Yields To 10 Year CD
The average 10 year bond yielded almost 33% more than the 10 year CD with a yield of 3.25%.
In this case, there is a structural reason why there is a big rate difference. Interest
rates are almost always lower for shorter periods of time. Banks want to keep their
cost of borrowing money as low as possible and often don’t want to pay a big premium
to clients investing for longer periods of time. On the other hand, corporations like
the certainty of not having to go back into the market and frequently re-finance debt.
Want really high yields?
If you’re willing to hold investment grade debt that is A rated, one notch below double
A, there are a number of bonds with 10 year maturities that yield between 4 and 5% from
companies such as JP Morgan Chase (JPM) and General Electric (GE).