Although, many corporations don’t invest heavily in CDs, public entities do. With treasuries at their current levels, Entities like Cities, school districts, etc are investing heavily into CDs. So besides Fed Funds keeping CD rates low, the flood of cash from them is also keeping the rates low.

I don’t believe the CD market is inefficient because there are programs such as CDARS and custodial CD programs that make the management and investment of CDs quite painless. Institutional investors that have their investment options limited are able to invest upwards of $40MM into CDs and the systems are quite efficient.

cd :O)

You are 100% Correct I am not comparing apples to apples.
1) I should have mentioned that Munis are not backed by the federal government. However, I would love to see what would happen if Cali defaults – if GM is too big to fail, what is Cali?

2) I live in NY, a high tax state – I should have made note of that.

Notwithstanding the above, the increased liquidity and effective higher return of a Muni Fund makes it seem like a better choice in most instances.

I don’t find the argument that CDs pay so well because the market for them is “inefficient” to be convincing. If the other markets were efficient and CDs were paying better, the smart players in those other markets would move in and “exploit” the better deals available in CDs.

Rob

I’d still argue that there’s something to be said for a lack of competing purchasers.

A quick glance at the current interest rates for Treasury securities as compared to CDs of a similar maturity gives some evidence that Roth’s argument isn’t too crazy.

Second thought: Your comparison isn’t exactly apples to apples, so to speak. Specifically, there’s a big difference in duration. According to Morningstar, VNYTX has an average effective yield of 7.28 years.

Also, while muni bonds obviously have a low default rate, they’re not backed by the Federal gov. Theoretically, this should increase yield somewhat.

Finally, you’re looking at a state muni bond fund. For the most part, these only appeal to investors in that state. Again, lower demand = higher return. (That said, when the muni fund’s yield is high enough–as appears to be the case from your quoted example–it should still attract out of state investors simply due to its federal tax free status.)

Rick: Good point regarding CDs in a 401k–unlikely to be an option. But yes, you can certainly get CDs in an IRA. Not necessarily the IRA you have now though…

That is, you might have to go to a bank, open an IRA with them, and buy a CD in that IRA. So, as I mentioned above, a bit of a pain!

I’d love to see the numbers because I find it hard to believe that CDs effectively pay more than MuniBonds. I am from NY so I looked up Vanguard’s NY Long Term Muni Bond fund (VNYTX) – As of 6/24 it is yeilding 3.82%.

On Bankrate there seems to be rates from 2%ish (1 year) to 4% on 5 year…but these are pre tax so effectively we are talking 1.75 to 3.5%ish WITHOUT LIQUIDITY vs. the liquidity found in a bond fund.

Thoughts?

-Rick Francis