CD's versus Treasuries

[doodle]

Short term CD's are yielding about twice the rate of treasuries right now.

Is anyone using them in lieu of treasuries in their portfolio?

Can anyone think of a scenario where CD's are at a disadvantage to treasuries being that they are backed by FDIC?

[MediumTex]

Can anyone think of a scenario where CD's are at a disadvantage to treasuries being that they are backed by FDIC?

Perhaps there are unseen risks associated with CDs compared to treasuries that are not currently easily observed.

I always assume the bond market is pretty efficient, and yield differentials exist for a reason.

[craigr]

Can anyone think of a scenario where CD's are at a disadvantage to treasuries being that they are backed by FDIC?

Yes. In a wide scale banking crisis FDIC could easily run out of funds. They almost did in 2009. They would go to the Treasury for a credit line, but if the budget were very bad due to the crisis it is uncertain how it could be handled. They may decide to delay access to the funds, or if it were bad enough, pay back less than what you had insured. Who knows?

T-Bills will always be paid because by not doing so the US govt. ceases to operate. If you have T-bills you will get paid unless there is something truly cataclysmic going on. In which case there are bigger problems.

Biggest thing for T-Bills though is the total liquidity in a crisis. Being able to access cash easily and know it is all there is a tremendous benefit in terms of rebalancing options and just peace of mind.

Plus, as Tex said, there is a reason why interest rates are higher even if it's not obvious why they are. If you keep the CDs under FDIC limits you are better protected and it may be worth the gamble. But they are not as safe as T-bills. Only you can weigh the plusses and minuses.

[WildAboutHarry]

FDIC-insured CDs do offer smaller investors something of a free lunch, in that the insurance limits are not relevant for institutional investors.  Insured CDs are kind of like savings bonds in that regard.

It would be interesting to know what CD rates would be if there were FDIC insurance without deposit limits.  I suspect the CD rates would drop to near-treasury levels.

[Lone Wolf]

FDIC-insured CDs do offer smaller investors something of a free lunch, in that the insurance limits are not relevant for institutional investors.  Insured CDs are kind of like savings bonds in that regard.

This is a good point.  While I keep the vast majority of cash in savings bonds and Treasury Bills \ Notes, it does always slightly bother me to miss out on the massive subsidy that is FDIC insurance.

It's clear to me that no private insurer would ever offer banks such a sweet deal as FDIC.  That makes FDIC insurance a grand subsidy insurance program offered at great discount by the generosity of the US taxpayer.  You can't beat the safety of T-bills but they do forego the advantage of this enormous subsidy program.

[moda0306]

I try to imagine our government allowing little old ladies everywhere lose their FDIC insured checking/savings/CD accounts and I just can't see it happening.  It would probably be the single most suicidal political decision ever to not have gov't step in in the face of an under-funded FDIC. The real risk, as I see it, would be the amount of time it would take to sort out.  And since the fed & treasury are so well plugged into the banking system, I can't imagine this being horrible.  I almost have to think that some kind of massive internet/computer breakdown is a higher risk than the gov't letting the FDIC fail at its job of insuring deposits.  And if that's the case, having a treasurydirect account with a bunch of T-Bills in it isn't going to help you any more than having an FDIC-insured savings account.

This is why I think holding some physical cash is so necessary.  A network shutdown might not be fixable by the fed/treasury nearly as fast as a FDIC failure would be. 

I know we should probably stick to the rules on this one, but if you look at the reality of the system, I really wonder if FDIC returns are really "chasing yield" so much as taking advantage of the subsidy LW mentioned. 

Craigr,

If the "budget is bad"???  Do you really think anything related to the deficit would keep them from funding little old ladies' FDIC accounts?  Given the constraints (or lack thereof) of the treasury/fed, I simply can't imagine it happening.  It's the lack of those budget constraints, in fact, that allow T-Bills to be 99.99999999% free of default risk.

[craigr]

If the "budget is bad"???  Do you really think anything related to the deficit would keep them from funding little old ladies' FDIC accounts?  Given the constraints (or lack thereof) of the treasury/fed, I simply can't imagine it happening.  It's the lack of those budget constraints, in fact, that allow T-Bills to be 99.99999999% free of default risk.

I don't know. But certainly if they choose to pay it could be delayed or possibly less than full insured amount, or means tested, etc. Who knows? These are all hypotheticals. But if the hypothetical were so bad that FDIC is testing the limits of solvency I'd rather just not be part of the debate by avoiding FDIC altogether.

[moda0306]

Well if it's means tested, I'm A-OK!! 

[WildAboutHarry]

This is why I think holding some physical cash is so necessary.

I used to think this was a bad idea, you know, cash is not earning any interest, etc. 

But at today's rates, who cares?  And home owners/renters policies cover cash losses due to theft, etc. up to some limit.  Now if I could only remember where I put my policy...