The Federal Reserve reduced its benchmark interest rate last month and is anticipated to make further reductions at the upcoming meeting. As a result, individuals should carefully consider where to store cash saved for emergencies or major purchases.
Certificates of deposit (CDs) are considered a safe option for reliable savings by many individuals. However, as interest rates decrease, the returns on CDs follow suit, and they have already begun to decline.
Treasury notes and bonds represent another secure option, potentially appealing to savers depending on their savings goals and intentions. An examination of both options can help determine the most suitable choice for individual savings needs.
Certificates of Deposit: Pros and Cons
Certificates of deposit provide a secure place to hold money while locking in an interest rate for shorter terms. For instance, if someone has set aside funds for their child’s college education and plans to store it for several years, high-yield CDs could be a beneficial option. The advantage of CDs is that the rate locks when purchased, ensuring returns do not fall below expectations. Additionally, deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Interest earned can either be withdrawn or reinvested (compounded) to accelerate growth.
As of October 1, 2024, data from the Federal Reserve Bank of St. Louis indicates that average interest rates for 12-month CDs are 4.38%, 24-month rates are 3.91%, and 60-month rates are 3.71%. CDs typically compound monthly, potentially providing the following returns over each term if compounded.
If individuals anticipate continued decreases in interest rates over the long term, CDs present a way to lock in saving rates. The longer the commitment, generally, the lower the rate, but short-term CDs might be advantageous amidst rate cuts. CDs are a suitable choice for those wanting growth without long-term ties.
Treasury Notes and Bonds: Pros and Cons
For those seeking to secure rates for extended periods beyond five years, Treasury notes, or bonds may be more appropriate. Both are similar, differentiated primarily by their investment duration. Treasury notes currently have a 10-year term, while bonds offer 20- or 30-year options. Investing in Treasury notes or bonds involves lending to the U.S. government in exchange for semi-annual interest payments. Investors can sell bonds before maturity without direct penalties, though market conditions may affect yields.
Treasury notes and bonds are purchased at a discount, relative to their face value, resulting in investment growth alongside earned interest. For example, a 10-year $10,000 Treasury note purchased for $9,500 at 3.875% interest matures to $10,000, with an additional $4,700 interest earned. These instruments are ideal for long-term investments, such as retirement savings, due to their stability and reliability as government-backed loans.
Which is Better?
There is no definitive choice between CDs and Treasury notes or bonds, as the ideal option depends on individual financial objectives and liquidity needs. Both are effective in maintaining high-interest returns in a declining interest rate environment, outperforming high-yield savings accounts.
