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CDs Aren't Just for Grandma Anymore

There's one risk-free investment whose returns are blowing away the competition. Where you'll find it, however, will shock you: your friendly neighborhood bank. If you want the best fixed-income returns with no risk, bank certificates of deposit are the place to be.

Trouncing Treasuries
You could hardly find a more unlikely candidate for the top of the interest-rate heap. When you think of bank CDs, you probably picture an elderly person walking slowly toward a bank building, clutching a savings-account passbook and looking forward to the weekly visit with the tellers and bankers. This person you're thinking of is a retiree who has saved as much as he or she ever will and is now trying to make ends meet on a fixed income.

Well, think again. As you can see, the best banks are paying rates on CDs that beat the pants off their risk-free rivals, U.S. Treasury securities.

Term

Rate on Treasury

Rate on CD

Offering Bank

6 months

5.03%

5.41%

E-Loan

1 year

4.90%

5.41%

AmTrust Direct

2 years

4.63%

5.30%

Alliance Bank (NASDAQ:ABNS)

3 years

4.55%

5.20%

NetBank (NASDAQ:NTBK)

5 years

4.54%

5.35%

E-Loan

Sources: Bloomberg, Bankrate.com

CDs are also doing better than most bond funds. Looking through a few of the best-yielding short-term bond funds reveals that yields are hovering between 4.5% and 5%, depending on whether the fund holds Treasuries, government agency bonds, or corporate debt. Intermediate-term funds have slightly higher yields, but you have to take on the high default risk of high-yield junk bonds to find funds that have consistently higher yields. Meanwhile, the FDIC insures your CD investment up to $100,000, so you run no risk of default.

Small investors win
The dominance of CD rates is a rare example of a situation in which small investors have an advantage over big institutional investors. If you're a fund manager with hundreds of millions of dollars to invest, you're not going to divvy up your money among thousands of different banks at $100,000 a pop. Treasuries give you the market depth you need to invest that kind of money. But for individual investors, $100,000 may well be more than enough to handle the fixed-income portion of your portfolio. And in most cases, it's easy to buy CDs, even from Internet-based banks that don't have branches in your area. With the magic of electronic funds transfer, your investment is often as easy as a click of the mouse.

So if you're looking for a no-risk investment with the best yields you can get, look no further than bank CDs. They're not just for Grandma anymore.

The Fool's Savings Center is designed to help savers find the best rates on their short-term savings. With its information on savings accounts, money market funds, and CDs, you'll get what you need to get all the interest you deserve.

Fool contributor Dan Caplinger backed up the truck on 6.25% CDs from Pentagon Federal Credit Union earlier this year. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy isn't just for Grandma, either.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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