The adage that there is no such thing as a riskless investment is generally true. There’s a correlation between risk and reward. If you want greater return potential on your investment, you will usually have to take on greater risk.

Even Treasury bonds, issued by the U.S. government, carry a bit of risk. The risk of default is small, so coupon payments and principal payment at maturity are effectively guaranteed. But they, like other bonds, carry interest rate risk and inflation risk.

If interest rates rise, the market value of your Treasury securities will fall. If you had to sell your bond(s) in a rising interest rate environment to raise cash, you would likely sell at a loss. Even if you held to maturity, there is opportunity cost: if your money had not been locked in the bond, you could have invested it in another bond that would probably pay a higher coupon rate.   

If inflation has taken off in the interim, the face value of the bond that you receive at maturity would have lost value in real terms. Due to inflation, the spending power of the same amount of dollars has decreased.

There is an alternative that investors sometimes overlook: certificates of deposit, or CDs.

CDs are similar to bonds in that they are fixed-income instruments that pay you an interest and the principal amount at maturity. However, CDs are issued by banks whereas bonds are usually issued by governments or companies.

CDs offer a great benefit that bonds don’t. CDs are FDIC-insured up to $250,000 per person, per bank. This means that the U.S. government guarantees to reimburse you up to $250,000 per CD account if the issuing bank fails. Assuming the U.S. government does not collapse, you could have fully-insured CDs with different banks with no risk of loss, as long as the amount in each account (including interest) does not exceed $250,000.

Banks usually offer a wide selection of CDs with different maturities. Since interest rates will likely continue to rise, it makes sense to buy short-term CDs no longer than one year. If interest rates rise, banks will offer higher CD rates, so when your old CD expires, you should be able to roll over into a new one at a higher rate (if that’s what you want).

The downside to CDs is that if you suddenly needed to withdraw the money, the bank will typically charge you a penalty of three or four months of interest for CDs with maturities of one year or less. For longer duration CDs, the penalty is usually six months of interest or more. This could end up more costly than selling a bond on the secondary market. 

You should also consider the tax angle. Interest rates on CDs are fully taxable unless held in an IRA or other tax-sheltered accounts. On the other hand, interest on Treasury bonds is exempt from state and local levels (but taxable on the federal level). Municipal bond interest is exempt from federal income tax. Additionally, municipal bonds issued within your state may also be exempt from state and local tax. If sold prior to maturity, however, any capital gain generated would be taxable.

Whether it makes more sense to invest in Treasury securities rather than CDs, or vice versa, will depend on your individual situation. Just don’t forget that CDs are a viable option if you have some cash you don’t want to invest into the market but you also want the cash to earn some interest.