CD, Savings Rates and Mortgage Rates Down - Weekly Rate Update

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The economic news last week didn't shed any great insight into what the future holds. If anything, the bias was a bit on the slow growth, slippery economic slope path. Several Nobel Laureates including Paul Krugman were talking about the prospects of a double dip recession. According to Krugman there is a 30-40% chance of a double dip. But economists are notoriously incorrect in their projections. The minutes from the December FOMC meeting also showed that the Fed is split on the economy's future. Several governors believe more economic stimulus is needed while others believe that it's time to start withdrawing all of the cash being pumped into the economy. Stalemate. Lastly, the Labor Department jobs report came out towards the end of the week and painted a good news, bad news picture. Good news first. Only 85,000 jobs were lost in December compared to 741,000 job losses in January '08. That's a nice improvement. The bad news, analysts were expecting even better results. Still an impovement of that magnitude is progress even if we are still losing, and not adding jobs.

All of this data points to great uncertainty about the economy. Will it continue to grow in 2010 or slip back into recession? Do we need to worry about inflation or deflation? The bond markets seem to indicate growth is coming. Last week the Treasury yield curve was at its steepest on record (you can read what that means in my post last week). I expect we'll get some kind of recovery although how it will play out in the US is still an interesting topic.

I read an article last week (I would like to link to it but can't find it) that said almost all of the gain household income over the last 20 years has been a result of women entering the workforce. After WWII the US was the richest country on Earth because every competitor lay in ashes. But starting in the 60s competition increased and the easy money made in the US started to slow. So, how will a rising China, India, Brazil, etc. impact American standards of living? I'd say that as long as we are a nation saddled with debt it will be hard to compete. Enormous wealth is being transferred abroad via America's insatiable purchases of cars, electronics, cloths, and payment on debt. The collapse of the banks is not only due to financial mismangement, but also due to the indebtness of America.

In many ways, the US macro economy reminds me of GM. A once powerful entity trying to paper over losses and core problems via financial machinations. In this type of climate I'm a little nervous about just how powerful and enduring this economic recovery will be.

Watching the Patriots lose today to the Baltimore Ravens, I'm also reminded that no one can stay on top forever. Gravity eventually exerts itself. Is the US in that kind of decline? I hope not but need to see some honest, straight-talk before I make up my mind. Part of me fears Americans have lost their pioneer spirit, their ability to sacrifice today for tomorrow. Once again, I hope that's not the case.

CD and Savings Rates

Part of the bankrupting of America is the total disdain shown for savers. Savings and CD rates continue to hover at pitiful rates. As long as the Fed keeps its Fed Fund rate at 0-.25% we're not going to see any significant increase in savings and CD rates. Average savings rates reached a new record low of 1.54% APY last week, down 1 basis point from 1.55% APY the previous week. Average nne-year CD rates dropped 2 basis points to a record low of 1.92% APY. Average three-year and five-year CD rates remained steady at 2.66% APY and 3.18% APY respectively.

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts - the spread between savings rates and 36-month CDs. In some ways, this ratio is purer because it cannot be influenced by government debt, Fed Treasury purchase programs, and other attempts to manipulate rates. As you can see below, the ratio between savings accounts (a short duration deposit account) and 3 year CDs has dropped slightly over the past three weeks. It's still at a very elevated level though, mimicking the Treasury curve. We'll be watching how the ratio develops over the next month to see if it provides any additional clues to the state of the market in 2010.

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. Many depositors may be willing to lock money away for 5-years at close to 3%. To me that's just not enough of a return for that period of time. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

Mortgage rates have benefited over the last year. Keep people buying is the government's mantra. And so the Fed has artificially lowered mortgage rates by buying up every mortgage backed security they can get their hands on. As the Fed's program reaches an end, mortgage rates are starting to inch back up.

Last week though broke the trend of four straight weeks of mortgage rate increases. The average rate on a 30-year fixed mortgage dropped from 5.14% to 5.09% according to data from Freddie Mac. This is consistent with data from the BestCashCow rate tables which show average 30-year mortgage rates moving from 5.211% to 5.143%.

The 15-year FRM this week averaged 4.50 percent down from from last week when it averaged 4.50 percent.  The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.44 percent this week, flast from last week's 4.44 percent. The 1-year Treasury-indexed ARM was flat, averaging 4.33 percent again this week.

The forecast though it for rates to continue to rise over the next year.

The rates above are just averages. To find the best mortgage rates in your area, visit the BestCashCow mortgage rates tables.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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