February 20, 2009 Update

I was away last week so apologize for not updating the savings and cd analysis. But the news would have been more of the same - continued drops in the rates for savings accounts and cd products. Based on conversations we've had with banks, they are cutting their rates in response to a flood of money being deposited by individuals looking for a safe place to stash their cash. With the stock market continuing to drop, money market fund yielding virtually 0%, and Treasury bonds paying a pittance, FDIC insured deposit accounts are a good bet.

Last week, Clear Sky Accounts from Chesapeake Bank stopped taking savings applications in response to the flood of money that was deposited in the bank. With so much money flooding into these banks and few places to put it, banks are scaling back their rates. While the rate of decline in savings rates and cd rates seems to have declined, the trend is still down.

Only the 3 year CD term shows a slight gain in average rate as reported by the BestCashCow rate tables. Yet, as we've seen before, a one week increase does not make a trend.

Still, not all is as bad as it seems. While rates have been trending down since mid-October 2008, so has inflation, somewhat compensating for the lower rates. As the chart below shows, the inflation adjusted return on a savings accounts is actually slightly higher than it was one year ago, before the financial crisis. And for those that had money in a savings account in November-December 2008, the inflation adjusted return spiked. The same is true for Certificates of Deposit.

Taken as a whole, low inflation in the second half of 2008 and 2009 will spike the actual return on savings accounts and certificates of deposit compared to 2008 when soaring oil and food prices eroded savings.

The changes from two weeks ago are:

• Savings Accounts: 16 basis point drop from 2.85% to 2.69% APY
• 1 Year CD: 10 basis point drop from 2.92% to 2.82% APY
• 3 Year CD: 2 basis point gain from 3.17% to 3.19% APY
• 5 Year CD: 8 basis point drop from 3.68% to 3.6% APY

Note: 100 basis points represents 1%. Thus a drop by 100 basis points would be a drop from 4% to 3%.

Here are the rate of drops for the eight five weeks since the Fed dropped rates, in percentage points.

• Savings Accounts: -.07, -.05, -.11, -.04, -.05 , -0.07, -.03, -11, NA, -16
• 1 Year CD: -.14, -.24, -.16, -.11 , +.08 , -.40, +.02 , 0.03, NA , -10
• 3 Year CD: -0.0, -.33, -.13, -.09, -.16 , -.13, +.06 , -.02 , NA , +2
• 5 Year CD: -.01, -.36, -.08, -.01 ,- .17 , -.18, +.08 , -.04 , NA , -8

 

• Compare the best CD rates.
• Compare the best savings rates.