By Ben Baden

Many five-year CDs offer higher rates than the 10-year treasury bond

Another volatile day on Wall Street brought another all-time record. Recently, the yield on the benchmark 10-year treasury bond hit a record low of 1.99 percent in intraday trading, as investors reacted to a barrage of negative news that has shaken stock markets throughout the world. In the United States, concerns have resurfaced about a potential double-dip recession, and fears continue to grow that the sovereign debt crisis in Europe is spreading from peripheral nations like Greece and Ireland to larger economies like Italy and Spain, throwing the future of the euro into question.

"Yields where they are right now are essentially pricing in an eventual recession," says Greg McBride, senior financial analyst at Bankrate.com. When investors get nervous, they generally flock to treasuries, which are perceived to be one of the safest places to stash money. The current flight to safety has pushed treasury yields to levels never before seen in history.

Treasuries suit investors that are purely seeking safety, which was the case for many institutional investors, McBride says. But investors seeking a decent yield will need to look elsewhere. "From the standpoint of yield, there's zero attractiveness to the treasury market," he says.

McBride recommends longer-term certificates of deposit. "The top-yielding CDs beat treasuries of the same maturity hands-down," McBride says. In fact, many five-year CDs offer higher yields than even 10-year treasuries. For example, a five-year CD from Ally Bank currently yields 2.2 percent. Meanwhile, a five-year treasury bond offers a yield of less than 1 percent.

Of course, investing in a five-year CD locks up that money for the entirety of that time period, so investors have to ask themselves if they're willing to tie up their money for that long. If you cash out of your CD early, you'll have to pay a early withdrawal fee. Depending on the bank and the penalty, it may be still be worthwhile, but McBride cautions that banks have begun to crack down on investors who try to get out early.

Another factor to consider before loading up on treasuries: Interest rates are near all-time lows, and they can't go much lower. When interest rates rise, the price of existing bonds fall, and that can mean trouble for fixed-income investors. The standard rule-of-thumb is that for every 1-percentage-point increase in treasury yields, investors should expect a bond fund to decline by the amount of its duration. "A lot of the same investors that are flocking to treasuries now for safety are going to get blindsided by interest-rate risk when interest rates eventually move up," McBride says.

CDs offer investors risk-free return, as long as the account is backed by the Federal Deposit Insurance Corporation. "You're getting additional return without any additional risk," McBride says. "That's the appeal of looking to CDs instead of treasuries."

 

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