The average one year CD average fell from .412% to .410% APY. Five year average CDs fell from 1.180% APY to 1.170% APY. Online savings dipped slightly for the first time in three weeks, falling from .735% to .734% APY. Online savings and money market average rates are now almost the same as 3-year CDs (which are paying on average .808% APY). Still, the top rates for 3-year CDs are higher. For example, in Massachusetts, where I live, Patriot Community Bank is offering a 1.50% APY CD while the top online savings/mm rate is 1.25% APY from Salem Five Direct.
So, would a saver be better off taking the 1.5% APY 3-year CD, or the 1.25% APY savings account? The chart below shows that online savings rates have become increasingly competitive versus 1 year CDs and by extension 3 year CDs. I expect that trend to continue as longer maturity CDs come down more than shorter. The chart below shows that the difference in yield between a 5 year CD and a 1 year CD has been dropping like a rock. Online savings rates offered by large online banks are often offered to support Treasury management, credit card lending, and other functions not as tied to loan demand. Demand remains strong for this money, and the larger online banks have not dropped their savings/mm rates as fast as the brick-and-mortar insitutions.
The chart below shows the comparison between the yield of a 5-year CD and a 1-year CD. Notice that this difference has shrunk considerably over the past year as the yield on 5-year CDs has dropped by more than the yield on a 12-month CD. This drop continued last week.
Because of the small difference in yield between online savings and 3 year CDs, I would choose an online savings /mm account over a three year CD. While I lose 25-40 basis points in yield, I don't like locking my money up for 3 years for such a small premium. While I think rates are still going to drift lower for the next 12-18 months, they may go up after that, which means for 25 percentage points, I've locked my money in. In addition, online savings/mm rates have remarkably stable over the last year.
So, why do I think rates will drift down for the next 12-18 months? Here's what I wrote last week which seems equally apt this week. So, I'm just going to cut and paste.
Factors Impacting Savings and CD Rates
Economic growth is steady but not fast enough to reduce unemployment. Several bits of data last week confirmed that economic growth is steady but subdued. Housing continues to show some bounce up from the deep bottom with the S&P/Case-Shiller index tracking a 3% increase in home prices from Sept 2011 to Sept 2012. Even a modest rebound in housing will help the economy as the sector will go from a large drag to a small benefit. That swing will add to growth. In addition, the Commerce Department released the 3rd quarter 2012 GDP numbers. Growth was revised upward to 2.7% but household purchases grew only at 1.4%, a relatively low number. After tax income adjusted for inflation grew at a .5 percent annual rate, down from a previously estimated .8 percent. Growth came in stronger than expected but incomes and purchases came in lower.
Holiday shopping may help jumpstart growth but the verdict is still out. No new figures on shopping trends for the holiday season after a strong start. But some analysts are predicting that shopping may be impacted by the aftermath of Hurricane Sandy as many on the East Coast focus on rebuilding instead of holiday shopping.
The Government remains stalemated on the fiscal cliff. It still seems most probable that some short-term resolution will delay spending cuts and tax increases, effectively kicking the can down the road.
Europe continues to choke on debt. The dance between Germany and Greece to figure out how to handle Greek debt continues, although Germany's stance is softening. Angela Merkel indicated yesterday she may be willing to consider writing down some Greek debt. Italian bonds continue to rally as yields drop and investor confidence seems to be returning. For now, Europe is quiet, although the core problems have not been resolved and Europe could be front center news at any time.
My outlook: Savings rates will continue to drift lower for the next 12-18 months before beginning to move higher. How high and how fast they move will depend on the government's ability to put a long-term budget deal in place, the continuation of a recent economic uptick, and the ability of Europe to put its woes behind it and resolve its fiscal problems.
Make the best of a tough savings situation
For now though, savers can make the best of a tough situation by getting the very best rates on their money. Remember, even in today's environment, there is competition for your cash.
I hope this is helpful. If it is, let me know and I'll keep writing. Drop me a note or post a comment below.
Hope you find some good deals in your Holiday shopping! Until next week...