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Why the big spread between 1 year CD's and Treasuries?

I get the liquidity issue, but that doesn't seem enough to explain it.

Do some people feel there is a risk spread between the two investments? I am trying to envision a scenario where the FDIC fails but the Treasury is still honoring its commitments. I always felt the two entities would fail simultaneously.

I want to park my cash for a year in 1 year CD's but am having trouble pulling the trigger. I'd like to go upstairs into the bomb shelter, but it seems safer here in the basement annex I dug in September.
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Why the big spread between 1 year CD's and Treasuries?

250,000 limit on FDIC insurance?
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Yes, that makes it cumbersome, but through Schwab you can buy an unlimited amount of CD's at various banks without opening up accounts -- you would want to be careful about going over the $250K limit due to a merger . . .
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It's basic supply and demand. The banks and credit unions who are offering the highest yields are ones that have moved to internet banking and/or brokered CDs, so they are in competition with each other, as well as the bank next door for the limited pool of small time savers.

Treasuries, on the other hand,are where the big money goes (not just because of FDIC limits). Hedge funds and other big time day traders play the Treasury market, driving down yields when they want to buy. This is where the international money goes and the pension plans, insurance companies, etc. So "flight to safety" for the big players means Treasuries. Us small folks have the CD option, and for once being the little guy is an advantage.
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"Do some people feel there is a risk spread between the two investments?"

Yes, Treasuries are as safe as the US dollar and are supported by Congress' ability to tax.

FDIC insurance is supported by premiums paid by banks. If large numbers of banks fail, a bailout from Congress could be required. But the odds are very low.

I agree, the main difference is competition and availability.
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Paul,

We discussed PWE and the Canadian Energy Trusts as a possible fixed income alternative investment about a year ago. How do you feel now?

Hockeypop
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"We discussed PWE and the Canadian Energy Trusts as a possible fixed income alternative investment about a year ago. How do you feel now?"

Hockeypop, I have not done any Canadian Royalty trusts. The US royalty trusts are attractive if you think oil prices have bottomed. Yields are likely to fall with oil prices.

I think the very high yield trust preferreds have better prospects. I posted a list of them here:

http://boards.fool.com/Message.asp?mid=27234224
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Treasuries, on the other hand,are where the big money goes (not just because of FDIC limits). Hedge funds and other big time day traders play the Treasury market, driving down yields when they want to buy. This is where the international money goes and the pension plans, insurance companies, etc. So "flight to safety" for the big players means Treasuries. Us small folks have the CD option, and for once being the little guy is an advantage.

What do you mean "for once"? The way I look at it, the little guy almost always has the advantage in the safe fixed income arena. The little guy can choose to buy CD's when they are advantageous, or treasuries when they are advantageous, or even savings bonds (I/E) when they happen to be advantageous. Not only that, but at auction, the big guys get exactly what they bid for a treasury (if they win the auction, obviously), while the little guy always gets the best bid.
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The way I look at it, the little guy almost always has the advantage in the safe fixed income arena.

Yeah, but if you want to buy individual bonds outside Treasuries, little guys are at a decided disadvantage.

Just look at the spreads on muni bonds at the individual investor level -- I'm sure big institutions don't pay anything close to that.

dan
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<< The way I look at it, the little guy almost always has the advantage in the safe fixed income arena.>>

Yeah, but if you want to buy individual bonds outside Treasuries, little guys are at a decided disadvantage.


This is absolutely true, I meant treasury-backed bond when I wrote "safe" above.

Just look at the spreads on muni bonds at the individual investor level -- I'm sure big institutions don't pay anything close to that.

The spreads are horrible and part of the reason I almost never buy individual bonds other than exchange traded ones.
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Spreads on individual muni bonds are outrageous. An individual without a $10 million portfolio should always use a bond fund.
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Spreads on individual muni bonds are outrageous. An individual without a $10 million portfolio should always use a bond fund.

In spite of the current risk to NAV? It's hard to imagine why anyone would want any part of a bond fund in this economic climate.
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NAV is just the last average traded price of all of a fund's bond holdings divided by the shares outstanding. If you own an indivdual bond, its value will fluctuate daily as well.
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NAV is just the last average traded price of all of a fund's bond holdings divided by the shares outstanding. If you own an indivdual bond, its value will fluctuate daily as well.

True, but a bond's value doesn't fluctuate on redemption day; whereas there is no redemption day for a fund.
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I once did a little study, pricing the exact same muni bonds at my full service brokerage vs my discount brokerage. On a $50K bond, the discount guys ran up to $700 less.
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While there is no risk to return of capital with an FDIC insured CD, there is earnings risk if your bank/savings and loan/credit union goes belley up.

Example: You chose 7% 2-year CD instead of others returning 5%. Three months into the term, the issuer has their dooors closed, and Uncle Sam or some other institution takes them over. You then get your money handed back to you. But now, your alternatative choice is not longer offering 5% CD's..the new rate is now 3%. So by choosing the riskier CD, you lost out on future earnings. This happened big time in the 1980's.

One other comment..someone wote that individual buyers of treasuy notes and bonds got the "best bid" price. I might be mistaken, but I think this is wrong. The individual investor gets the note or bond at the average bid, not the best bid.
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blacktreechaser

When a bank or credit union is taken over by another institiution, the new insitution has the right to call the CD, but this is not always exercised. I've had many S&Ls and banks taken over and only twice had a CD called. when they do this they usually offer you another CD at reduced interest. This just happened to me when Cardinal State Bank was taken over by Yadkin and reduced a 5% APY CD to 1%. I withdrew my money and put it into a Morgan Stanley Bank CD with 5% APY.

brucedoe
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