We just started the second quarter of 2014 and I wanted to check bank rates and see how they are doing compared to my forecast. At the beginning of the year, in my 2014 Savings Rate Outlook, I made the following predictions.
My outlook: Savings account rates will stay flat through 2014 although online savings account rates may increase by 20-30 percentage points. I project the highest online savings account next year will yield 1.75% APY. Short term savings rates will edge up slightly but longer term CDs (3-5 year) will continue the trend we have seen over the past six months and continue to move up. I expect we'll see the biggest increases in these longer duration CDs. We already have one credit union (PenFed) offering a 3%+ APY five year CD. Look for this trend to continue.
So, how are these predictions doing?
As the chart below shows, savings and CD rates are mostly flat. Since the beginning of the year, the following has happened:
- 1 year average CD rates have fallen slightly from 0.348% APY to 0.346% APY.
- 3 Year average CD rates have also fallen two basis points from 0.713% APY to 0.711% APY.
- 5 Year average CD rates have risen from 1.083% APY to 1.095% APY.
- Online Savings account average rates have risen from 0.712% APY to 0.739% APY.
So, for the most part, this follows my forecast. Now, let's take a look at the top rates for several products.
Top Rate Recap
Over the last quarter, top rates have risen a bit on shorter duration deposit accounts and significantly on 5 year CDs.
- Online Savings: At the end of last year, the top online savings rate was GE Capital Bank at 0.90% APY. Today, five banks hold the top spot at 1.00% APY. This is still a long way off from the 1.75% APY I predicted one of the top banks would have. It's going to take some strong economic growth to reach this number.
- 1 Year CD: In December 2013, Nationwide Bank held the top spot at 1.06% APY with a $100,000 minimum balance. Today BAC Bank Florida has the same rate, also with a $100,000 minimum balance. GE Capital Bank still sits right below the top rate with a 1.05% APY rate and a smaller $500 minimum balance.
- 3 Year CD: In December, Salem Five Direct offered a 3-year CD paying 1.50% APY. Today, Navy Federal Credit Union offers a 1.55% APY CD with a $100,000 minimum balance.
- 5 Year CD: At the end of last year, iGoBanking.com had the top rate with a 2.05% APY CD. Now, CIT holds the top rate with a 2.30% APY CD with a $100,000 minimum balance. GE Capital Retail Bank offers a 2.25% APY CD with a $25,000 mimimum.
- Rewards Checking: Hope Credit Union and Money One Federal Credit Union both continue to have the top rewards checking rate of 3.01% APY for balances up to $10,000. Both credit unions are open to members from across the country.
Top rates are either flat or up, mimicking the averages. The 1.75% APY online savings rate is a stretch, but I'm hoping one bank will rise to the challenge. Come on bankers, let's give the people some yield.
Online Saving and CD Spread
The difference between average 1 year CD rates and average online savings rates surged to a new high at the beginning of 2014, as online savings rate averages rose sharply and 1 year CD rate averages stayed flat. On average, online savings account rates pay 0.393 percentage points more than 1 year CDs, up from 0.23 percentage points more at the beginning of 2012. As we've been saying, it currently makes much more sense to put money into an online savings account or money market account than it does to lock it away in a 1 year CD. The premium for locking up the money in a rising rate environment is just not high enough in most cases. This trend has continued into 2014.
General rate environment
The economy continues to muddle along, the same story it's been singing since 2011. A couple of months of optimism are followed by several months of poor indicators and spirits sink. The stock market has been powering forward but this seems more like a response to the Fed's easy money policy than a true indicator of underlying economic conditions.
The economy added 192,000 jobs in March and the unemployment rate held steady at 6.7%. While under Bernanke, the unemployment rate was promoted as a key indicator of when the Fed would raise rates, Chairwoman Yellen has backed away from such a black and white reading. So, just because the rate reached 6.5%, the Fed won't necessarily begin to raise rates. This will keep short-term deposit account rates from moving up very much unless the economy begins to show more life.
The unwinding of quantitative easing has helped boost long-term CDs. If the Fed continues to pare back its bond buying, five year CD rates will continue to move up.
It's unclear if the cold winter weather hindered hiring, but to me, it's clear that the economy is still weak, and that blaming low numbers on the cold weather is just a symptom of this weakness.
The news from Europe revolves around the Ukraine and Russia. These events could have an economic impact if Russia decides to raise gas prices significantly on Europe, providing more headwinds to an already anemic economy. Headline news about the risk of Italy, Spain, or Greece going under have faded, for now.
One piece of good news: the government avoided another protracted battle over the debt ceiling. The midterm elections should help further clarify the government's direction and hopefully some of Washington's gridlock will ease.
My outlook: I'm sticking with my 2014 predictions for now: Savings account rates will stay flat through 2014 although online savings account rates may increase by 20-30 percentage points. I project the highest online savings account next year will yield 1.75% APY. Short term savings rates will edge up slightly but longer term CDs (3-5 year) will continue the trend we have seen over the past six months and continue to move up. I expect we'll see the biggest increases in these longer duration CDs.
Savings Accounts or CDs?
The data continues to show that opening an online savings account is a better bet than a 1 CD and I expect this to hold through 2013. Online savings accounts have held the line over the past year and even though CD rates have stabilized and ticked up, the premium is still not enough to jusity locking the money away. With yields on 5 year CDs increasing, there is an argument to be made that it might be worth looking at a longer duration CD. Yields on the top 5 year CDs are over 2X the top online savings accounts. The 3% 5 year PenFed CD offered last year was certainly attractive and at the right rate, I could be convinced to lock up some money.
For money you want to keep liquid though, go with an online savings accounts. If you do want to invest in a 3 year CD, be sure to shop around. Some online banks and local and community banks pay decent rates. DO NOT simply put your money into a big bank. Their CD rates are generally terrible.
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Comments
Shorebreak
April 08, 2014
A barbell is a good CD investment strategy if you don't get enough reward for using intermediate term CDs. For example, you might feel like long term CD rates are attractive, and you're willing to tie up some of your portfolio in long term CDs. However, as maturities get shorter, rates might go down too quickly. In that case, you may decide it's best to just use online savings accounts for your short and intermediate term money. You then keep the flexibility to reinvest in intermediate term CDs once interest rates improve.
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PJ Kay
June 11, 2014
Hope Credit Union does NOT allow out of state to open their rewards checking account, even though they will accept membership in the CU.
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