March 6, 2009 Update

Savings rates continued to drop this past week but 12, 36, and 60 month CD rates actually rose according to the averages on the BestCashCow rate table. According to what we're hearing from banks, money continues to flood into deposits as the stock market recorded one of its worst weeks ever, falling to a 12 year low. In response, banks are furiously dropping savings rates. But the rise in longer-term CD yields raises some interesting questions. The spread between the average three year CD and the average savings rate has increased dramatically in the last five weeks (from .14 basis points on 1/23/2009 to .65 basis points today) as savings rates have continued to drop and CD rates have stabilized. Why?

One theory is that you and I aren't willing to lock our money up for 3-5 years for under 3%. We know the recession (or depression as some are calling it) won't last forever and the administration's stimulus program could result in inflation. The falling stock market also chnages the equation. At some point, the market will rally. As we get closer and closer to 6,000, stocks start to look more attractive. The adage buy low certainly seems to fit here. It's possible banks are beginning to recognize that their customers need higher compensation to lock-in for any term over 1-2 years and are starting to raise longer-term rates in response.

If this trend persists it's a good sign for the economy. Like a steepening bond yield curve, higher future rates show a confidence in the future. Or at least show some fear of inflation. But at this point, I think we'd take a bit of inflation.

Next week I'll explore this a bit more.

Now, back to the rates. The changes from last week are:

• Savings Accounts: 12 basis point drop from 2.57% to 2.45% APY
• 1 Year CD: 1 basis point gain from 2.82% to 2.83% APY
• 3 Year CD: 1 basis point gain from 3.11% to 3.10% APY
• 5 Year CD: 5 basis point gain from 3.54% to 3.59% 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 since the Fed dropped rates, in percentage points.

• Savings Accounts: -.07, -.05, -.11, -.04, -.05 , -0.07, -.03, -11, NA, -16, -12, -12
• 1 Year CD: -.14, -.24, -.16, -.11 , +.08 , -.40, +.02 , -0.03, NA , -10 , -6, +1
• 3 Year CD: -0.0, -.33, -.13, -.09, -.16 , -.13, +.06 , -.02 , NA , +2 , -8, +1
• 5 Year CD: -.01, -.36, -.08, -.01 ,- .17 , -.18, +.08 , -.04 , NA , -8 , -6, +5

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