Savings and CD Rate Update - November 26, 2012

Savings and CD update and analysis, strong holiday shopping and interest rates, analyzing different CD terms for the best yield versus time commitment.

The downward trend continues with CD rate averages falling again in the previous week. The one year CD average fell from .417% to .414% APY. Five year average CDs fared even worse falling from 1.194% APY to 1.185% APY. Online savings rates were a bright spot with the average rising from .731% to .733% APY. Online savings and money market rates have remained relatively firm this year in comparison to CD rates as the chart below shows.

Holiday Shopping Starts Off with a Bang

The National Retail Federation said Sunday that a record 89 million people shopped either online or in stores this past holiday weekend. That's up from 86 million last year. The shoppers spent on average $423 this weekend versus $398 last year. This adds another positive data point to the recent spate of news that the economy may be gaining some life (other good news included gains in housing and consumer confidence). If strong consumer spending materializes over the next month, it will provide more support for increased economic growth.

The economy now needs to navigate the fiscal cliff and figure out how to put the millions of unemployed back to work. Once the unemployment rate dips below 7% savers can begin to think about rising interest rates..

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.

So, what's a saver to do in this environment?

Savings Options

Should a saver open a savings account or a CD? A shorter-term CD or a longer one? 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.

Not much has changed with the various product spreads. While the spread started the year at 1% or 100 basis points, it is now .771%. As a comparison, in 2008, this spread stood at .43% while in 2010 it went as high as 1.56%. So right now, it's somewhere in the middle. Why does this matter? Because back in 2010 banks were paying a saver a lot more to invest in a 5 year CD versus a 1 year. Today, banks are giving about half the premium they did a few years ago to lock up your money for 5 years. In 2012, I advised savers to consider investing in 5-year CDs because of this premium: the economy looked stuck for quite some time, and inflation did not appear to be a problem. Now, with the premium down, and the economy growing (albeit not that fast) it's a bit of a harder case to make. If the government takes the economy over the fiscal cliff, then it makes sense to put money in longer-term CDs as the potential for another recession becomes much higher. If a compromise can be reached, I'd invest in shorter-term CDs. Consumers might want to consider laddering their CD portfolio in this rate environment.

What about the comparison between savings and CDs?

This spread has actually been growing. Online savings rates have, for the most part, maintained their rates while CD rates continue to fall. For short term savings, it appears to make more sense to park money in an online savings account versus a CD. Online savings accounts have remained very stable over the past year.

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...

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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  • Sol Nasisi

    November 27, 2012

    Article update.

    More good news. Housing prices rose by 3% in year ending in Sept. More evidence that economy is gaining some momentum.

  • Sol Nasisi

    November 28, 2012

    Erskine Bowles, the co-chairman of President Barack Obama’s 2010 fiscal commission said today it's unlikely a deal will be struck in 2012 to avoid the fiscal cliff.

    “I’m really worried,” Bowles told reporters. “I believe the probability is we’re going over the cliff.”

    This is just his gut estimate so who knows but it's one data point. I still think they will find some temporary remedy.

  • Sol Nasisi

    November 29, 2012

    Commerce department releases the 3rd quarter GDP numbers. Growth 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.

    No surprises. The economy is growing moderately but spending and wage growth remains subdued. Nothing here changes the rate forecast.

  • Robert LeGassick

    December 13, 2012

    Where are you located--???

    I see that there is a Lompoc bank, but no address

    Interested in CD

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