Savings and CD Rate Update - January 13, 2013

Savings and CD Rate Update - January 13, 2013

Rate information contained on this page may have changed. Please find latest cd rates.

Average CD rates continue to drop while average online savings remain firm. Top nationally available rate is 1.85% APY. Rate outlook is still for gradual decline in rates until 2014.

It's the second week in January and the downward trend continues for all but online savings accounts. One year average CD Rates moved from 0.403% to 0.400% APY and by next week should be below the .40% APY mark. Five year average CDs dropped from 1.156% to 1.147% APY, one of the largest weekly drops in the past year. Average Online Savings Rates remained steady at .742%.

The top nationally available rates have all remained steady from last week::

There are plenty of local CD rates that beat these nationally available online rates, especially in the longer-term CDs. Check local CD rates.

BestCashCow Mention in the WSJ

The weekend edition of the Wall Street Journal published an article entitled "Finding High Rates Online" that mentioned BestCashCow and quoted yours-truly on the behavior of online savings rates. It discussed that while some banks have lowered online savings account rates over the past year, other banks have raised their rates, including Ally Bank, American Express, ableBanking, and SalemFiveDirect.com. It continues the narrative we've been discussing in previous weeks of how online savings rates have held up pretty well over the past year.

The chart below shows the trend in average rates since October 2012.

The difference in the rate of decline between online savings and CD rates can be viewed on the chart below, which shows the spread between online savings account rates and 12 month CDs. Last week this spread hit a 12 month high of .342 percentage points, eclipsing last week's 12 month high of .339. On average, online savings account rates pay .342 percentage points more than 1 year CDs, up from .23 percentage points more at the beginning of last year.

General rate environment

My forecast remains unchanged from last week. I am forecasting that rates will continue to gradually move lower in 2013. My reasoning includes:

  • The Fed has committed to keeping rates exceptionally low as long as unemployment is above 6 1/2 percent. It currently stands at 7.9%. At the current rate of decline, it will take at least 2-3 years to get to 7.9%. If the economy picks up, it could get there sooner.
  • The economy has picked up a bit of steam in the last couple of quarters. But GDP growth of 1-2% will not be enough to quickly bring down the unemployment rate. I project steady but moderate economic growth of around 2.5% in 2013.
  • Bank are awash in cash from individuals and corporations and do not need more deposit dollars. Third quarter 2012 FDIC data showed banks had over $9 trillion in deposits, up from $8.5 trillion in the third quarter of 2011. Many banks are having trouble figuring out how to deploy their cash. Part of this is because of lending fears and credit quality and the other part is due to increased governmental oversight.
  • Demographic trends are unfavorable. Unfortunately, the United States has entered a demographic slide. As the large baby boom generation ages and retires, this puts a large strain on the country's productivity and spending. I believe that demographics is a general driver of economic development. A young population lifts all boats. An aging will leave quite a few boats stranded and make it difficult for the others. Japan and Europe have even worse demographic problems and their economies reflect that. As China's population ages, look for its growth to ebb. This demographic slide will be a factor for the next ten to twenty years, not stopping growth, but certainly acting as a headwind.
  • Government grid-lock over the debt ceiling and sequestration. Gridlock continues and although unlikely the U.S. could begin to default on its obligations if the debt ceiling is not raised. Either way, the partisan bickering does little to establish confidence.

Potential positive Black Swans (unforseen events that could skew the forecast). Read my article from last week on Black Swans and how they impact forecasts.

Negative:

  • A major natural disaster, pandemic, or terrorist attack.
  • A major bank collapse in Europe, China, or Japan.
  • War in the Middle East (not exactly unforseen)
  • A major political change that causes conflict or threatens established institutions

Positive:

  • A technology break-through related to energy, medicine, communications, transportation, or some other field.
  • General lifting of pessimism.

If you have any more Black Swans, post them below. I'm an optimist so I'd like to think that progress and achievement will win out. It's why I'm banking on rates going up in the next 12-18 months. Minus any major black swans, here is my savings rate forecast for 2013.

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 stop bickering and resolve their budget and borrowing disputes, the continuation of a recent economic uptick, technological advances, and the ability of Europe to put its woes behind it and resolve its fiscal problems.

Check in every week for a discussion of these factors are changing and how they impact my rate forecast. Feel free to comment with your thoughts below and add any potential Black Swans that may change the course of the economy and rates.

Savings Accounts or CDs?

The data shows that opening a savings account is a better bet than a 1-3 year term CD and I expect this to hold through 2013. Many online banks have raised their savings rates over the past six months while CD rates continue to fall.

So for now, here are my recommendations:

For money you want to keep liquid, go with online savings accounts. They offer better rates than 1-3 year CDs and have shown good rate stability over the past year.

For longer-term money, look to open 4-5 year CDs at local community banks. BestCashCow research has shown that community banks and credit unions offer the most competitive rates on longer-maturity CDs.

I believe this is the best and easiest strategy for keeping your cash liquid and maximizing your savings over the next year.

Make the best of a tough savings situation in 2013

Yields may be low in 2013 but a savvy saver can boost the return with no increase in rate by rate shopping. By shopping around, a saver can earn an extra half to full percentage point. On $100,000, that's $1,000 in extra cash per year. Remember, even in today's environment, there is competition for your cash.

As always, I welcome your thoughts and comments.

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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Today's Highest Online CD Rates

Bank Product Term Interest Rate (APY)
Quontic Bank 1-Year 2.25% APY with $1,000 minimum
Navy Federal Credit Union 1-Year 2.20% APY with $100,000 minimum
BAC Florida 1-Year 2.15% APY with $100,000 minimum
Connexus Credit Union 3-Year 2.50% APY with $5,000 minimum
Navy Federal Credit Union 3-Year 2.35% APY with $100,000 minimum
Bank5 Connect 3-Year 2.30% APY with $500 minimum
Dollar Savings Direct, a division of Emigrant Bank 5-Year 2.80% APY with $1,000 minimum
Connexus Credit Union 5-Year 2.60% APY with $5,000 minimum
Prime Alliance Bank 5-Year 2.50% APY with $500 minimum

See More Online CD Rates →

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