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Decline in Treasury Bill Yields Making CDs Look Better

January 14, 1998|TOM PETRUNO

Americans have $1.67 trillion invested in fixed-income mutual funds, including bond funds and money market funds. That's a lot of money, to be sure--which explains why so much is written about fixed-income funds when interest rates are moving sharply up or down.

But often overlooked in the rate debate is that most peoples' savings isn't in bond funds, but rather in the bank. Regular savings accounts at banks and S&Ls, for example, alone hold $1.4 trillion. Small "time" deposits--certificates of deposit of $100,000 or less--hold another $964 billion, according to Federal Reserve Board data.

Which means that changes in yields on savings accounts and short-term CDs have greater relevance to most Americans than the 30-year Treasury bond yield's daily gyrations.

And for all of those people dependent on the whims of bankers for decent interest earnings on savings, there is some surprisingly good news: While short-term market interest rates have been falling sharply in recent weeks, CD yields have barely budged.

The annualized yield on six-month CDs nationwide, as tracked by Bradshaw Financial Network of Ashland, Mass., now is 4.83%. That is down just 0.01 percentage point since Dec. 19, a lack of movement that Martin Bradshaw of Bradshaw Financial says may indicate that banks and S&Ls are simply eager to hold on to deposits amid still-strong loan demand.

By contrast, the yield on six-month Treasury bills has fallen 0.27 point in the same period, to 5.17% as of Wednesday.

That still means that, at least in judging national average CD yields, there remains a significant yield advantage in owning six-month Treasury bills over owning six-month CDs, assuming you have the $10,000 minimum to buy the T-bill.

But the decline in Treasury yields on longer-term maturities has been so sharp since mid-December that longer-term CDs now may pay more than Treasuries, depending on the maturity.

Bradshaw Financial says the national average yield on five-year CDs now is 5.51%, down just 0.04 point since Dec. 19.

Five-year Treasury note yields, by contrast, have tumbled 0.40 point since Dec. 19, from 5.7% then to 5.3% currently--which means they yield 0.21 point less than the average five-year CD.

So shouldn't everybody be buying five-year CDs instead of T-notes? Not necessarily. Although CDs have higher nominal yields, interest paid on CDs is taxed by both Uncle Sam and by most states (including California), whereas interest on Treasuries is taxed by Uncle Sam but not by states.

Given California's high income tax rates, the tax-exempt status of Treasury interest gives Treasuries an automatic advantage over CDs even when CD yields are slightly higher.


Still, there are plenty of banks and S&Ls paying CD yields well above the national averages. Which means that you can find CD yields that beat Treasuries, even accounting for Treasuries' tax advantage.

Bradshaw's weekly CD survey (published each Sunday in The Times' Business section) last week found two banks offering federally insured, one-year CDs at yields of 6.2%, a full percentage point above the current one-year T-bill yield and more than a full point above the CD national average.

In another weekly CD listing that appears in The Times on Sunday--and includes mostly Southern California banks and S&Ls--last week's tally showed an average yield of 5.54% on one-year CDs of $2,500, nearly half a percentage point above Bradshaw's national average.

So if you're looking to lock in yields today, and you're willing to shop around, you can find decent yields on CDs despite the decline in short-term Treasury rates and other short rates.

And you should be willing to shop around, Bradshaw notes. As long as a CD is federally insured, your money is as safe earning 6% at one bank as it would be earning 5% at another. "Savers should get the very best rates they can," Bradshaw says.


Tom Petruno can be reached at


CDs Hold Up

Average yields on bank certificates of deposit nationwide have held virtually steady since mid-December, while yields on U.S. Treasury securities have fallen sharply. A comparison of average CD yields and Treasury yields in three maturities:


Dec. 19* Now* Change (percentage points) Six-month T-bill 5.44% 5.17% --0.27 Six-month CD 4.84 4.83 --0.01 One-year T-bill 5.47 5.19 --0.28 One-year CD 5.12 5.09 --0.03 Five-year T-note 5.70 5.30 --0.40 Five-year CD 5.55 5.51 --0.04


* Annualized yields

Source: Bradshaw Financial Network

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