March 22, 2009 Update
Savings rate continued to drop over the last week while longer term CDs (3-5 years) mostly held their ground. Ths continues a trend we have noticed over the past couple of weeks in which the rate difference between long-term deposit accounts and short term continues to grow. This spread reached .73 basis points on Friday, up from .69 last week. What does that mean? It means that based on the averages derived from the BestCashCow rate tables, you would earn .73 percentage points more putting your money in a 3 year CD versus a savings or money market account. In January, that spread was only .14 percentage points.
As the chart below shows, rates have dropped in lock-step with Fed Funds rate cuts. But with the Fed unable to cut rates any further, long-term deposit rates have stabilized. Short term rates continue to drop. As investors have shifted money out of the stock market and into FDIC insured accounts, bank have been deluged with cash, allowing them to drop the rates they pay without fear of losing deposit dollars.
As I speculated several weeks ago , the stabilization of long-term rates may be a good sign for the economy. Indeed, over the last couple of weeks, major stock markets have staged an impressive rally. If this continues, look for savings and money market rates to begin to stabilize and for long-term rates to rise as the government\\\'s stimulus programs kick-in and inflation fears increase. The yield curve on Treasury bonds has been steepening lately in another indiciation of future inflation expectations.
Another reason for rate stabilization is that at some point (and that point is coming), investors will become unwilling to lock their money in for any significant duration in an account that pays below 2-3% APY.
In this environment, staying with shorter-duration investments may be the best bet.
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