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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35363  
Subject: Re: CD or treasury bill ? Date: 6/20/2006 11:12 AM
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Let's not overplay relatively minor issues, such as state and local taxes and lag time in transactions. The issue in choosing between "fixed-income" choices of the same risk level that fit liquidity needs is simply yield. In high state and local tax situations, obviously Treasuries and TIPS (and sometimes other government issues) get a comparative boost in yield compared to CDs or Money Markets (except "Federal" Money Markets) or Corporates, etc. But a boost of 25 or even 50 basis points doesn't make up for a 100 basis point difference in interest payments.

Also, although lag time in transactions may make a big difference for those using very short term "fixed-income" instruments as temporary holding places while waiting for something better to come along, if you are looking to optimize return on fixed-income instruments for the long term, a little lag time to get a 6% 5-tear CD instead of a 5% Treasury is well worth the wait of a few days.

I'm generally pleased with T-Direct, now the Treasury and TIPS yields are more competitive. But we just went through a period of almost 5 years when Treasuries and TIPS were not competitive with the better paying CDs, and given that banks and credit unions have to compete with each other and are more susceptible to local supply and demand needs than the Treasury, I think it is likely we will continue to find occasional opportunities where some bank or credit union is offering a significantly better after-tax yield than Treasuries.

Also, for those looking to put away "fixed-income" for the long term, who are simply trying to maximize yield and not have liquidity for buying opportunities, it is always difficult to decide whether to go with shorter term instruments, with the hope of higher yields when those instruments mature, or to lock in current rates for longer. This may especially be a dilemma when yields are flat or inverted. But, as tempting as 6 month T-bills may look at the moment, there is no guarantee that yields, short term and long term, won't be lower in 6 months. There may be talk of inflation and higher rates, but the economic prognasticators are almost universally talking economic slowdown, and common sense suggests to me that this time they may get it right. Even if there isn't recession, that might lead to flight from stocks to bonds or cuts in rates by the Fed, which in turn, might mean lower interest rates.
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