CD Rates vs Treasury Rates: Which Pays More When the Fed Pauses?

Fact-checked by the CapitalLendingNews editorial team

Comparing CD rates vs treasury rates is one of the most practical decisions a saver can make in a pause environment — and in July 2025, that comparison has rarely mattered more. The Federal Reserve has held the federal funds rate steady in the 4.25%–4.50% target range since late 2024, creating a window where both instruments offer competitive, predictable returns that deserve a side-by-side look before you lock in your money.

When the Fed stops moving rates, both CDs and Treasuries reprice slowly — but they don’t move in lockstep. CD rates are set by competing banks and credit unions, while Treasury yields are set by the bond market at auction. That structural difference means one consistently beats the other depending on market conditions, your tax situation, and your holding period. Understanding which is which — right now — can mean hundreds of extra dollars per year on a $50,000 deposit.

This guide is for savers, retirees, and conservative investors who want a clear, step-by-step framework for deciding where to park cash when the Fed isn’t moving. By the end, you’ll know how to compare yields on an apples-to-apples basis, factor in taxes, avoid early-withdrawal traps, and build a laddering strategy that keeps your money working hard regardless of what rates do next.

Step 1: How Are CD Rates and Treasury Rates Actually Set?

CD rates are set by individual banks and credit unions competing for your deposit dollars, while Treasury rates are determined by the U.S. bond market through weekly auctions — and this fundamental difference explains why one can outperform the other even when the Fed isn’t moving.

How CD Rates Work

Banks price their certificates of deposit (CDs) based on their own funding needs, competitive pressure from other institutions, and their expectations for future interest rates. When a bank needs to attract deposits, it raises CD rates. When it has plenty of liquidity, it quietly lets rates drift lower.

Online-only banks like Marcus by Goldman Sachs, Ally Bank, and Discover Bank consistently offer CD rates 0.50%–1.00% above national brick-and-mortar averages, according to Bankrate’s national CD rate tracker. This is because they have lower overhead costs and rely entirely on deposits for funding.

How Treasury Rates Work

U.S. Treasury securities — including Treasury bills (T-bills, maturing in 4 weeks to 52 weeks), Treasury notes (2–10 years), and Treasury bonds (20–30 years) — are sold at weekly auctions managed by the U.S. Department of the Treasury. Yield is determined by investor demand at auction, not by any single institution’s decision.

When economic uncertainty rises or investors flee to safety, Treasury yields actually fall — because demand for the securities increases, pushing prices up and yields down. This inverse relationship is critical to understanding why Treasury yields can move differently than CD rates even during a Fed pause.

What to Watch Out For

The national average CD rate published by the FDIC is a misleading benchmark. As of mid-2025, the national average for a 1-year CD sits near 1.81% APY, according to FDIC national rate data — dragged down by the low rates at big traditional banks. Always compare top-tier online rates against Treasuries, not the national average.

Step 2: How Do I Compare Current CD Rates vs Treasury Rates on an Equal Footing?

To compare CD rates vs treasury rates accurately, you must match them by term length and convert both to an annual percentage yield (APY) — because Treasury bills are quoted on a discount basis, not an APY basis, which makes them look slightly lower than they actually are.

How to Do This

T-bill yields are quoted as a discount rate or a bond-equivalent yield (BEY). The BEY is the closest equivalent to an APY for comparison purposes, but it still doesn’t account for compounding. Most financial tools — including TreasuryDirect’s rate listings and brokerage platforms like Fidelity and Charles Schwab — display T-bill yields in BEY format for easy comparison.

When comparing a 6-month CD advertised at 5.00% APY against a 26-week T-bill yielding 4.95% BEY, the CD appears to win — but only slightly. The real differentiator at that margin is your state income tax rate (covered in Step 3).

Use this comparison framework:

1. Match your target holding period to the closest Treasury term (4, 8, 13, 26, or 52 weeks).
2. Find the most recent auction yield at Treasury.gov’s daily rate page.
3. Compare that BEY against the highest APY from a top-tier FDIC-insured online bank for the same term.
4. Then proceed to Step 3 to apply your after-tax adjustment before making a final decision.

What to Watch Out For

Do not compare a brokered CD yield from a brokerage platform to a Treasury yield without checking whether the brokered CD is callable. Callable CDs allow the issuing bank to redeem your CD early if rates fall, cutting off your return. Standard bank CDs purchased directly are not callable.

Product	Term	Approx. Yield (July 2025)	Tax Treatment	Liquidity	Insurance/Backing
6-Month CD (Online Bank)	6 months	4.90%–5.10% APY	Federal + State + Local	Penalty for early withdrawal (90 days interest)	FDIC up to $250,000
26-Week T-Bill	~6 months	4.90%–5.00% BEY	Federal only (no state/local)	Saleable on secondary market anytime	U.S. Government (full faith and credit)
1-Year CD (Online Bank)	12 months	5.00%–5.25% APY	Federal + State + Local	Penalty for early withdrawal (150–180 days interest)	FDIC up to $250,000
52-Week T-Bill	12 months	4.85%–5.05% BEY	Federal only (no state/local)	Saleable on secondary market anytime	U.S. Government (full faith and credit)
2-Year Treasury Note	24 months	4.40%–4.60% BEY	Federal only (no state/local)	Saleable on secondary market anytime	U.S. Government (full faith and credit)
18-Month CD (Online Bank)	18 months	4.75%–5.00% APY	Federal + State + Local	Penalty for early withdrawal (150–180 days interest)	FDIC up to $250,000

Step 3: How Do I Calculate Which Pays More After Taxes?

Treasury interest is exempt from state and local income taxes, while CD interest is fully taxable at every level — this single difference can make a lower-yielding Treasury more valuable than a higher-yielding CD, especially if you live in a high-tax state.

How to Do This

Use the tax-equivalent yield formula to convert a Treasury yield into a comparable CD yield:

Tax-Equivalent CD Yield = Treasury Yield / (1 – State Tax Rate)

For example, a California resident in the 9.3% state income tax bracket who earns a 4.95% T-bill yield effectively earns the equivalent of 5.46% from a CD (4.95% / 0.907 = 5.46%). That means the T-bill outperforms any CD yielding less than 5.46% for that investor.

For savers in states with no state income tax — including Texas, Florida, Nevada, and Washington — Treasuries lose this advantage entirely. In those states, the raw yield comparison is what matters most.

What to Watch Out For

Federal tax treatment is identical for both CDs and Treasuries — both generate ordinary income taxed at your marginal federal rate. Do not confuse this with capital gains treatment. If you sell a Treasury on the secondary market before maturity at a gain, that gain may be subject to capital gains tax, which is a separate consideration from the interest income.

Also keep in mind that if your total interest income pushes you into a higher federal bracket, both instruments are affected equally. The state-tax advantage of Treasuries remains regardless of federal bracket changes. For more on how rising rate environments affect your overall financial picture, see our guide on how rising interest rates affect your credit card balance — because tax-efficient yield gains can be quickly erased by high-rate debt.

Step 4: What Happens If I Need My Money Early — CD or Treasury?

Treasuries are more liquid than CDs because they can be sold on the open market at any time through a brokerage account, while CDs impose early-withdrawal penalties that can eliminate months of earned interest.

How to Do This

If you anticipate any chance of needing your funds before maturity, Treasuries are almost always the better choice. You can sell a T-bill or Treasury note on the secondary market through TreasuryDirect, Fidelity, Vanguard, or Charles Schwab within one to two business days. The price you receive will reflect current market rates — you may receive slightly more or less than you paid — but there is no fixed penalty.

CD early-withdrawal penalties vary by institution and term:

• 3-month CDs: Typically 90 days of simple interest.
• 6-month CDs: Typically 90–150 days of simple interest.
• 1-year CDs: Typically 150–180 days of simple interest.
• 2-year CDs and longer: Typically 180–365 days of simple interest.

At a 5.00% APY on a $50,000 CD with a 180-day penalty, withdrawing early costs you approximately $1,232 in forfeited interest. That’s not a trivial cost. Compare that to Treasuries, where selling on the secondary market might cost you only the bid-ask spread — often just a few basis points.

What to Watch Out For

Some banks offer no-penalty CDs (also called liquid CDs) that allow early withdrawal without a fee, usually after a short holding period of 6–7 days. Ally Bank and Marcus by Goldman Sachs both offer no-penalty CD products. However, these typically yield 0.25%–0.50% less than standard CDs of the same term, so you’re paying for the flexibility in the form of a lower rate.

Understanding the real cost of illiquidity is also relevant if you’re managing other financial obligations. If you’re balancing CD investments alongside loan repayments, read our comparison of debt avalanche vs. debt snowball methods — because high-yield CDs only make financial sense when your debt interest rates are lower than your CD yield.

Step 5: Should I Build a CD Ladder or a Treasury Ladder When the Fed Pauses?

A laddering strategy — staggering maturities across multiple terms — is the most effective approach during a Fed pause, and it works equally well with CDs or Treasuries. The goal is to maximize yield on longer terms while maintaining regular access to maturing funds.

How to Do This

A basic 4-rung ladder on $40,000 might look like this:

• $10,000 in a 3-month T-bill or short-term CD (maturing in 90 days).
• $10,000 in a 6-month T-bill or CD (maturing in 180 days).
• $10,000 in a 12-month T-bill or CD (maturing in 1 year).
• $10,000 in a 2-year Treasury note or CD (maturing in 2 years).

Each time a rung matures, you reinvest at the longest term in your ladder. Over time, every rung becomes a 2-year instrument — but you always have money coming due within the next three months. This structure is particularly valuable during a Fed pause because you’re capturing longer-term yields without committing all your cash at once, protecting against the risk that rates move unexpectedly.

You can also build a hybrid ladder — using T-bills for shorter rungs (where tax advantages matter most and secondary market liquidity is highest) and online bank CDs for longer rungs (where APYs may be slightly more competitive on 12-to-18-month terms).

What to Watch Out For

If the Fed signals a rate cut before your longer-term rungs mature, locking in today’s rates becomes an advantage rather than a risk. However, if the Fed resumes hiking — an unlikely but possible scenario — you’ll benefit from the regular reinvestment cycles built into your ladder. The laddering approach is designed specifically to hedge that uncertainty.

For a broader picture of how to position your savings when the rate environment is shifting, our article on CD rates vs. high-yield savings accounts covers how to decide which vehicle makes sense for the cash you want to keep accessible rather than locked up.

Step 6: Where Should I Actually Buy CDs or Treasuries Right Now?

You can buy Treasuries directly from the U.S. government at no cost, or through a brokerage that gives you more flexibility — while CDs should be purchased directly from online banks to capture the highest available APYs rather than settling for brokered CD rates.

How to Do This

For Treasury securities, you have two primary options:

• TreasuryDirect.gov: Buy directly from the U.S. Treasury at auction. Zero fees. Minimum purchase of $100. Best for buy-and-hold investors who won’t need to sell early. Account setup takes approximately 10–15 minutes.
• Brokerage accounts (Fidelity, Schwab, Vanguard): Buy at auction or on the secondary market. Offers better liquidity tools and consolidates your investments in one place. Fidelity charges no commission on Treasury purchases.

For CDs, always purchase directly from the issuing bank rather than through a brokerage unless you specifically want a brokered CD for a unique term or yield. Top institutions to check in July 2025 include Marcus by Goldman Sachs, Ally Bank, Discover Bank, CIT Bank, and Synchrony Bank. Use Bankrate’s CD rate comparison tool to verify current top rates before opening any account.

What to Watch Out For

Confirm that any CD you purchase is held at an FDIC-insured institution and that your total deposits at that bank — across all account types — do not exceed the $250,000 coverage limit per depositor, per institution. If you have more than $250,000 to place, spread deposits across multiple institutions or consider using multiple ownership categories (individual, joint, IRA) to maximize coverage.

If you’re also thinking about how this rate environment affects variable-rate debt or refinancing decisions, understanding how to lock in a low interest rate before the Fed moves again is directly relevant to both sides of your balance sheet — not just your savings strategy.

Frequently Asked Questions

Are Treasury bills safer than CDs right now?

Both are considered extremely safe, but Treasury bills are backed by the U.S. government’s ability to tax and print currency, while CDs are backed by FDIC deposit insurance up to $250,000 per depositor, per institution. For balances under $250,000, both instruments carry effectively zero default risk. Above that threshold, Treasuries have no coverage limit, making them safer for large deposits.

Which pays more right now — a 1-year CD or a 1-year Treasury?

In July 2025, the best 1-year CDs at online banks yield approximately 5.00%–5.25% APY, while the 52-week T-bill yields approximately 4.85%–5.05% BEY. Top CDs currently have a slight raw yield edge. However, if you pay state income tax, the Treasury’s state-tax exemption can flip the advantage — especially in states with rates above 5%.

Do I owe state taxes on Treasury bill interest?

No. Treasury interest — including T-bills, Treasury notes, and Treasury bonds — is exempt from all state and local income taxes under federal law. You still owe federal income tax on it. This advantage is most significant for investors in high-tax states like California (13.3% top rate), New York, and Oregon.

Can I sell a Treasury before it matures if I need the money?

Yes. Treasuries purchased through a brokerage can be sold on the secondary market at any time on any business day. The sale price reflects current market rates — if rates have risen since you bought, you may receive slightly less than face value. There is no fixed early-withdrawal penalty, unlike a CD.

What is the minimum amount needed to buy a Treasury bill?

The minimum purchase for a Treasury bill through TreasuryDirect.gov is $100, and purchases are made in $100 increments. Through a brokerage like Fidelity or Schwab, the minimum is typically $1,000, though this varies by platform. CDs at most online banks have minimums ranging from $0 to $2,500.

Should I use a CD or Treasury inside my IRA?

Inside an IRA, the state-tax advantage of Treasuries is irrelevant — all income in a Traditional IRA is tax-deferred regardless of the source, and Roth IRA income is tax-free. In that context, choose whichever instrument offers the higher raw yield for your target term. Top 1-year CDs inside an IRA custodial account currently beat comparable Treasuries by approximately 15–25 basis points at online banks.

What happens to CD rates and Treasury yields when the Fed starts cutting rates?

When the Fed cuts rates, Treasury yields typically fall immediately — since they’re priced by the market, which moves ahead of the Fed. CD rates fall more slowly, because banks reprice deposits on their own schedules. This means CDs often lock in higher rates for longer after a rate cut begins, making them advantageous for locking in today’s yields before a cutting cycle starts.

Is it better to buy CDs or Treasuries in a high-inflation environment?

Neither CDs nor nominal Treasuries protect against inflation — both pay fixed nominal yields. If inflation rises above your yield, your real (inflation-adjusted) return goes negative. For inflation protection, consider Series I Savings Bonds or Treasury Inflation-Protected Securities (TIPS), which adjust their principal based on the Consumer Price Index (CPI).

How do I know if the CD rate I’m being offered is actually competitive?

Compare any CD rate you’re offered against the top rates published on Bankrate, DepositAccounts.com, or NerdWallet’s CD rate tracker. If the rate is more than 0.50% below the top national rates for the same term, you’re leaving money on the table. Your local bank or credit union may offer convenience, but rarely the best rates.

Can I use both CDs and Treasuries in the same savings strategy?

Yes — and for most savers, using both is optimal. A hybrid ladder that pairs T-bills (for liquidity and state-tax efficiency on shorter terms) with top-tier online bank CDs (for slightly higher APYs on 12-to-18-month terms) captures the best features of each instrument. This approach is particularly well-suited to a Fed pause environment like the one in mid-2025.