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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: CD or treasury bill ? Date: 6/20/2006 12:35 AM
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In choosing between fixed-income instruments of the same credit quality and the same maturity, the impact of taxes is typically the most important consideration. But transit time, i.e., how long it takes to move money into a vehicle and out of it, can also be a consideration.

One advantage of dealing with Treasury Direct, rather than messing around with CD's, even if the yield of the latter calculates out to be slightly superior, is that Treasury purchases and redemptions are instantaneous on the day of issue and the day of redemption. Whereas if one is chasing CD yields all over the country, there are going to be transit lags which have the effect of extending the holding period, thus degrading the yield.

Obviously, a lot of money has to be involved before transit time becomes significant, or the purchases have to be repetitive. But right now, except for isolated examples offered by credit unions that few investors have access to, nothing is beating the yields to be obtained from Treasuries, nor the ease of dealing with the Treasury Department. That has not always been the case in the past, nor will it likely always be the case in the future. But right now, short-term Treasuries are a Saver's sweet spot, especially the 6-months bill.

As always, due to the fact that each investor's/saver's circumstances are different, there are going to be exceptions to that broad, sweeping statement. So each person has to run their own numbers.

Also, even if the yield between tax-advantaged instruments and fully taxables one is exactly the same, or slightly favors fully taxable ones, there might be a "avoidance effect" whereby the advantaged security should be chosen. In other words, if choosing Treasuries rather than CD's (or their equivalent) lowers one's tax bracket enough so that one isn't hit so hard with taxes on one's other incomes, then they become the preferred choice.

Again, the effect probably won't become significant unless large sums of money are involved. But the satisfaction of reducing the amount of money that the government condfiscates through taxes might a source of satisfaction that is priceless.

Lastly, I'd argue that constantly dealing with the same institutions enables efficiency and proficiency. Yes, one has to keep an eye on CD rates using sources of information like wwww.bankrate.com. But by dealing with the Treasurry Department in a sustained and persistent fashion, one develops a "feel" for yield curves that can be invaluable.

Obviously, I'm a huge fan of TreasuryDirect. It's a shame that the government is borrowing the huge sums of money it is, and the interest rates we are being paid are, in some sense, coming out of our own pockets or our children's children's pockets. But there are good arguments to be made for having a country's borrowings come from the savings of its own citizens rather than foreign capital. That's straining the notion of patriotism a bit (or the notion of doing well by doing good). But I'd rather keep those dollars here in this country rather than pay them out to overseas investors.
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