This year's spectacular decline in interest rates on U.S. Treasury securities has changed the competitive landscape for savers.
While it used to be a slam-dunk to earn a much higher yield on Treasury bills than on bank certificates of deposit of the same term, that isn't necessarily true anymore.
Which means that anyone thinking of locking in short-term yields today--anticipating even lower interest rates ahead--should shop around the banks and S&Ls, especially if a T-bill is your first choice.
A few numbers illustrate the story:
* On Jan. 1 you could have earned an annualized yield of 7.17% on a one-year T-bill. In contrast, the average yield at that time on one-year CDs at Southern California banks and S&Ls was 5.77%, according to rate-tracker Bradshaw Financial Network.
So the T-bill paid a tidy 1.40 percentage-point premium over the average CD.
* Today, one-year T-bills yield 5.66%, while the average Southland one-year CD pays 5.47%, according to Bradshaw. The nominal T-bill yield advantage has shrunk to 0.19 point over the average CD.
Why the narrowing spread? Treasury yields are determined in the marketplace, which means they can rise or fall quickly as investors change their views about the direction of interest rates in general. And for several months now, investors have been betting that the weakening economy will continue to depress rates.
CD yields are set arbitrarily by banks and S&Ls. Although they follow the market, bank and S&L rates tend to rise, and fall, much more slowly.
Also, even though the economy's weakness has weighed on interest rates, some banks and S&Ls are still lending aggressively and thus are hungry for funds.
The Bradshaw survey, which appears on page D2 today, shows the highest one-year CD yield among major Southland institutions is 6.02% at Santa Barbara-based California Thrift & Loan. That yield is 0.36 point above the current one-year T-bill yield.
Nationally, Bradshaw director Martin Bradshaw says the highest one-year CD yield available is 6.34% at Loyola Federal Savings Bank in Maryland. That is 0.68 point above the one-year T-bill yield.
Given that virtually all banks and S&Ls today are covered by the same federal deposit insurance, CDs are essentially as safe as T-bills, within the $100,000 insurance limit. So it makes sense to grab the best yield you can find.
There is, however, still one important advantage that T-bills have over CDs: T-bill interest is exempt from state income tax, while CD interest is fully taxable.
In high-tax states such as California, that means CD yields must be significantly above T-bill yields to provide a better return.
Consider: A California couple filing a joint tax return and with taxable income of between $61,975 and $94,250 is in the 28% federal marginal tax bracket and the 9.3% California marginal tax bracket, for a combined effective rate of 34.7% (which takes into account the deductibility of state taxes on your federal return).
If that couple earns 5.66% on a one-year T-bill, their true yield after paying federal tax on the interest is 4.08%.
If they earn that same 5.66% on a one-year CD, their true yield after paying federal and state taxes is 3.70%.
But at the current highest national one-year CD rate of 6.34%, the true yield would be 4.14%--enough to overcome the T-bill's tax advantage.
With the spread between T-bills and the average CD having narrowed so sharply, some savers who otherwise might have bought T-bills may decide it's not worth the extra effort even if the T-bills yield a bit more.
You need at least $10,000 to buy a three-month, six-month or one-year T-bill, and you must buy either through a broker or directly from the Federal Reserve (in California, phone (213) 624-7398 for an application).
Three- and six-month T-bills are sold each Monday; one-year T-bills are sold monthly, with the next auction Thursday.
It isn't terribly complicated to buy from the Fed once you learn the ropes (there are no commissions), though it's still more work than simply opening a CD account with a bank or S&L.
Point is, as interest rates slide it's worth your while to find the best yield out there. Some CDs are competitive again with T-bills.
Advice for Fund Sellers: With the stock market at a record high, some long-time stock mutual fund investors may understandably be nervous--and wondering if they should take some money off the table.
If that describes you, the good news is there's one issue that needn't loom large in your deliberations: taxes.
You may think you'll have a huge capital gains tax liability if you sell a stock fund you've owned for many years. But it's important to remember that unless the fund is in a retirement account, you've been paying capital gains taxes all along. So even if you take a big chunk of your accumulated profit out of the fund, your tax on the sale is likely to be quite small.