Savings Account and Certificate of Deposit (CD) Rate Analysis

May 8, 2009 Update

It's been a couple of weeks since my last update. I apologize for the delay but life has a way of interrupting.

Perhaps the most significant development over this period is that CD rates seem to have bottomed. As the chart below shows, the declines we saw in the previous months are a thing of the past. At the same time, the gradual rise we noticed last month in 3 and 5 year CD rates also seems to have ended. Holding pattern may be the best way to describe the situation.

SavingsandCDRateAnalysis

Savings and money market account rates continue to drop. The average rate is now approximately 2% points above the Fed Funds rate. It's hard to see how rates can go much lower in the current environment with a rising stock market and some attractive corporate and municipal bond yields. At some point, investors are going to throw in the towel and pull their cash in such a low rate environment. And that's precisely what the Fed wants. Spend, spend, spend. Or help reliquify the stock market.

As has been written before, the low savings and cd rates are a nice subsidy to the banks courtesy of all the savers out there. Banks can take money at 1-2% and then lend it out at 5-10%, depending on the loan type. It's another way the Fed is helping to recapitalize the banks. Look for banks to report hefty profits because of this. If rates start to edge up though and the spread narrows, then those profits will also shrink.

Speaking of spreads, below is the spread between the average savings and money market rate on BestCashCow and the average 3-year CD rate on BestCashCow. There hasn't been much movement in the last month. Savings rates have fallen but so have 3-year CD rates. We'll talk more about the implications of that next week.

SavingsandCDRateSpread