Five Year Treasury Notes Zoom Ahead Of Bank CD Rates

Longer term CD rates have been gradually climbing since last December as the long end of the yield curve has moved up.   Abused savers, who have seen yields plunge to microscopic levels due to the Federal Reserve’s zero interest rate policy (ZIRP) are justifiably hoping to see an increase in interest income from savings.

The Fed’s zero interest rate policy is a zero sum game – every problem bank and heavily leveraged borrower benefiting from ZIRP comes at the expense of prudent savers and owners of debt securities.  Low interest rates have been the conduit for a massive transfer of wealth from savers to debtors.

The super low cost of short term funding has allowed the country’s largest banks to increase net interest margins throughout the financial crisis.  As rates for savers and bondholders  has plunged, the largest banks have seen interest margins steadily increase.

Interest Margins - source: FDIC

As margins improved at the largest banks, rates for depositors have fallen to a fraction of a percent on short term deposits.

The recent increase on the longer end of the yield curve has resulted in slightly higher rates on 5 year CDs.  According to, the average yield on a 5 year CD has increased from 1.5% to 1.61% since mid December.  Bank of America, the largest bank in the country, is currently offering only 1.2% on a 5 year CD according to the Bank’s website.

5 year CD - courtesy

A better option to improve the yield on savings is available by purchasing super safe 5 year treasury securities.  The current yield on the 5 year Treasury note is 2.27%, which is 41% or 66 basis points higher than the average five year bank CD.   A $100,000 Treasury note will yield $660 more per year than the average 5 year bank CD.

Government Bonds, Yield Curve - courtesy

Treasury securities can be purchased commission free directly from the government at  Treasury securities are backed by the full faith and credit of the U.S. Government and are considered to be riskless.  In addition to the much higher interest rate, U.S. Treasury securities are exempt from state and local taxation which increases the effective yield over bank CDs.  Interest is paid semi-annually.

One factor to keep in mind is that the market value of the 5 year treasury note will vary with changes in interest rates.  If interest rates decline, the value of the note will increase.  If interest rates rise the value of the note will decline.  For investors holding the note to maturity and purchasing at par value, market value fluctuations are of minor concern since, at maturity, the note is paid off at par value.

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