Treasury Bills vs. CDs: Which Low-Risk Investment Offers the Best Yield in 2026?

Treasury Bills vs. CDs: The 2026 Yield Showdown

Both Treasury Bills and certificates of deposit (CDs) are low-risk, income-generating instruments — but calling them interchangeable is a mistake that can cost you real money. As of mid-2025, short-term Treasuries (3-month and 6-month maturities) yield more than comparable CDs before taxes. Flip to maturities of one year and beyond, and the picture reverses: CDs typically carry higher headline rates to compensate for their lower liquidity.

The more important difference, however, is rarely mentioned in rate comparisons: tax treatment. Treasury interest is exempt from state and local taxes. CD interest is not. For investors in high-tax states like California, New York, or Vermont, that distinction alone can swing the decision. This article breaks down both instruments using current data so you can make an informed choice based on your time horizon, tax bracket, and need for liquidity — not just the headline number.

This article is for informational purposes only and does not constitute personalized financial, tax, or legal advice.

What Are Treasury Bills and How Do They Work in 2026?

Treasury Bills (T-Bills) are short-term debt obligations issued by the U.S. government with maturities ranging from a few days to 12 months. The most commonly purchased terms are 4-week, 8-week, 13-week (3-month), 26-week (6-month), and 52-week (12-month) bills.

T-Bills are issued at a discount and redeemed at face value. For example, you might pay $9,750 for a $10,000 T-Bill — the $250 difference is your interest income. They are backed by the full faith and credit of the U.S. government, which carries no insurance cap. Unlike FDIC insurance, the federal government has the authority to raise taxes or issue new currency to meet its obligations.

How Yields Are Set

Yields on short-term T-Bills (under one year) track Federal Reserve policy closely. When the Fed raises or lowers its target rate, T-Bill yields move with it. Yields on longer-term Treasuries (notes and bonds beyond one year) are shaped more by supply and demand dynamics in the secondary market.

Where and How to Buy T-Bills

• TreasuryDirect.gov: Purchase directly from the government with no commissions or fees. Minimum purchase is $100.
• Brokerage accounts: Major brokerages including Fidelity, Schwab, and Vanguard allow T-Bill purchases at auction or on the secondary market — typically commission-free.
• Banks: Many banks offer T-Bill access, though fees may apply.

A key advantage: T-Bills trade freely in the secondary market. If you need cash before maturity, you can sell. The price you receive may be above or below your purchase price depending on rate movements at the time, but there are no contractual early-withdrawal penalties.

What Are Certificates of Deposit (CDs) and When Should You Use Them?

A CD is a deposit product offered by banks and credit unions. You agree to leave your money on deposit for a fixed term — typically 3 months to 5 years — in exchange for a fixed interest rate. At maturity, you receive your principal plus accrued interest.

CDs are FDIC-insured up to $250,000 per depositor, per bank. That insurance protects your principal in the event of a bank failure. One practical note: FDIC insurance covers principal but is not unlimited in the way Treasury backing is — if you’re depositing more than $250,000, you need to spread it across multiple institutions or use a brokered CD program.

The Liquidity Trade-Off

The primary limitation of CDs is illiquidity. Early withdrawal penalties are contractually defined and typically range from 90 days to 12 months of interest, depending on the term. In some cases, particularly on short-term CDs, the penalty can effectively wipe out all accrued interest or even eat into principal.

How Banks Price CD Rates

Banks set CD rates to attract deposits while remaining profitable. Because banks themselves hold large amounts of U.S. Treasuries on their balance sheets — Bank of America held over $350 billion in Treasuries and government agency securities at the end of 2024, according to public filings — CD rates are structurally linked to Treasury yields. Banks must offer competitive rates to attract depositors, but they also need margin to operate. That relationship partially explains why CD rates and Treasury yields track each other, but never perfectly.

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Yield Comparison: Treasury Bills vs. CDs in 2026

The table below reflects approximate before-tax yields by maturity as of mid-2025, based on data from Charles Schwab’s BondSource and Bloomberg. Specific rates change daily — use these as directional guidance, not exact current figures.

Sources: Bloomberg Treasury data and Schwab BondSource CD data (as of May 2025, illustrative). Rates are subject to change.

Rate Direction Through 2026

Multiple forecasters expect CD and short-term Treasury yields to drift lower through 2025 and into 2026 as the Federal Reserve maintains or gradually reduces its policy rate. If that expectation holds, locking in current rates now — particularly at longer maturities — may be advantageous. Waiting for yields to recover could backfire if rates continue declining.

The Tax Angle: How to Calculate Your Real After-Tax Return

Before-tax yield comparisons are incomplete. The actual return you keep depends on your combined marginal tax rate. Here is the critical difference:

• Treasury interest: Subject to federal income tax. Exempt from state and local income taxes.
• CD interest: Subject to federal, state, and local income taxes in full.

After-Tax Yield Formula

Use this calculation to compare your real returns:

CD After-Tax Yield = CD Rate × (1 − Combined Federal + State + Local Tax Rate)

Treasury After-Tax Yield = Treasury Rate × (1 − Federal Tax Rate Only)

Worked Example: California Investor in the Top Federal Bracket

Assume a California investor with a 37% federal marginal rate and a 13.3% state rate is choosing between a 3-year CD yielding 3.90% and a 3-year Treasury yielding 3.51%:

• CD after-tax yield: 3.90% × (1 − 0.37 − 0.133) = 3.90% × 0.497 = ~1.94%
• Treasury after-tax yield: 3.51% × (1 − 0.37) = 3.51% × 0.63 = ~2.21%

The Treasury yields meaningfully more after tax despite having a lower headline rate. As noted by Fidelity’s research, even in this scenario the full 3.51% Treasury yield is preserved from state taxation, while the CD drops to approximately 3.38% after federal taxes alone — or much lower when California’s 13.3% rate is included.

Example: A More Modest Tax Situation

Now consider an investor in a state with no income tax (like Texas or Florida) at a 22% federal rate:

• CD after-tax yield (3.90%): 3.90% × (1 − 0.22) = ~3.04%
• Treasury after-tax yield (3.51%): 3.51% × (1 − 0.22) = ~2.74%

Here, the CD wins after tax. The state exemption provides no benefit when the state tax rate is zero, so the CD’s higher headline rate carries through to the net result.

Takeaway: Always calculate after-tax yield using your specific marginal rates before committing capital. For investors in high-tax states, Treasuries can outperform CDs even when the CD carries a meaningfully higher headline rate.

Liquidity, Safety, and Flexibility: Which Fits Your Financial Plan?

Liquidity

Treasuries can be sold in the secondary market on any business day before maturity. You may receive a price above or below your purchase price depending on where interest rates have moved — but there is no fixed penalty structure. This makes them suitable for money you might need access to without certainty about the exact date.

CDs impose contractual early withdrawal penalties. Typical penalties range from 90 days of interest on short-term CDs to 12 months or more of interest on multi-year CDs. In some cases, withdrawing from a short-term CD within the first few months means you receive no interest at all.

Safety

Both instruments are extremely safe, but the nature of that safety differs:

• Treasuries: Backed by the U.S. government with no cap on protection. The government has unlimited taxing authority to meet its obligations.
• CDs: FDIC-insured up to $250,000 per depositor, per bank. Amounts above that threshold are unprotected in the event of bank failure.

For investors placing large sums — $500,000 or more — Treasuries eliminate the need to manage FDIC exposure across multiple institutions. CD laddering across different banks can address this limitation but adds operational complexity.

Flexibility

If your timeline is uncertain — for example, you may want to redeploy cash into equities or real estate within the next 6 to 12 months — short-term Treasuries serve as an effective “parking lot” for capital. Short-term Treasury ETFs (which hold T-Bills maturing in under one year) add another layer of daily liquidity for those who prefer fund structures over individual securities.

Who Should Choose Treasury Bills vs. CDs in 2026?

Choose Treasury Bills If:

• You live in a state with a meaningful income tax rate (above roughly 4–5%)
• You need the option to access funds before a fixed maturity date
• You are placing more than $250,000 and want unlimited government protection
• You prefer short maturities (under one year) where Treasuries currently yield more before and after tax
• You want to avoid early withdrawal penalties

Choose CDs If:

• You live in a state with no income tax or a low marginal rate
• You have a defined time horizon with no expected need for the funds before maturity
• You prefer simplicity and want FDIC-specific insurance on deposits
• You are targeting maturities of one year or longer where CD headline yields are typically higher
• You benefit from the discipline of locked-in savings you cannot easily liquidate

Consider a CD Ladder for Medium-Term Goals

A CD ladder staggers your deposits across multiple maturities — for example, equal amounts in 1-, 2-, 3-, 4-, and 5-year CDs. As each CD matures, you either use the funds or reinvest at the current rate. This approach combines higher long-term yields with periodic liquidity and reduces the risk of locking all your money in at a single rate.

High-Net-Worth Considerations

Investors placing $1 million or more in low-risk instruments should lean heavily toward Treasuries. Managing FDIC exposure across four or more banks to stay insured is possible but operationally burdensome. Treasuries scale without limitation and carry no counterparty risk.

How to Get Started: Buying Treasury Bills and CDs in 2026

Buying Treasury Bills

1. TreasuryDirect.gov: Create a free account at treasurydirect.gov. Purchase T-Bills at weekly auctions with a $100 minimum. Proceeds deposit directly to your bank account at maturity.
2. Brokerage accounts: Fidelity, Charles Schwab, and Vanguard allow T-Bill purchases at auction or in the secondary market, commission-free in most cases. This option offers more flexibility to sell before maturity.
3. Short-term Treasury ETFs: Funds such as SGOV (iShares 0-3 Month Treasury Bond ETF) or BIL (SPDR Bloomberg 1-3 Month T-Bill ETF) offer daily liquidity and automatic reinvestment. Useful if you want Treasury exposure without managing individual securities.

Buying CDs

1. Online banks: Institutions like Marcus (Goldman Sachs), Ally, and Discover consistently offer above-average CD rates compared to traditional brick-and-mortar banks. Compare rates at Bankrate.com or DepositAccounts.com before opening an account.
2. Brokered CDs: Available through Fidelity, Schwab, and similar platforms. Brokered CDs can be sold on the secondary market before maturity (prices may vary), adding limited liquidity not available with direct bank CDs.
3. Credit unions: Often competitive on shorter-term CDs. Insured by the NCUA (equivalent to FDIC) up to $250,000.

Before You Commit: A Practical Checklist

• Calculate your combined marginal tax rate (federal + state + local) and run the after-tax yield comparison above.
• Confirm your time horizon. If there is meaningful uncertainty, lean toward Treasuries.
• Check current rates at Bankrate, DepositAccounts, and your brokerage’s fixed income screener. Rates change weekly.
• For amounts over $250,000, use Treasuries or spread across multiple FDIC-insured banks.
• Review your position quarterly. Yields and your tax situation change. If rates fall significantly, evaluate whether to reinvest at maturity or shift capital allocation.

Bottom Line: The Right Choice Depends on Your Tax Situation and Timeline

For short maturities (under one year), Treasury Bills currently offer higher yields before and after taxes across most investor profiles. For longer maturities, CDs carry higher headline rates — but state tax exemptions on Treasury interest close much of that gap for anyone in a high-tax state.

Neither instrument dominates universally. Run the after-tax math for your specific situation. If you live in California, New York, or another high-tax state, a Treasury yielding 3.51% frequently beats a CD yielding 3.90% once state taxes are accounted for. If you are in Texas and in a lower federal bracket, the CD may win on net yield and simplicity.

The one consistent piece of actionable guidance: given that yields are projected to decline through 2026, locking in current rates at your preferred maturity now is likely preferable to waiting. The window for historically elevated short-term yields is narrowing.