For the third month in a row, longer-term CD rates have risen. And for the first time, short term CD rates showed some signs of life, rising slightly before falling back and staying flat. The month-over-month declines we saw over the last five years appear to be over.
From one month ago, 12 month average CD rates decreased by two basis point from 0.353 to 0.351% APY. They actually rose slightly at the beginning of September before falling back, the first rise in over two years. Average 3 year CD rates increased from 0.710 to .715% APY and 5 year average CDs increased from 1.056% to 1.073% APY, up from their low of 1.049% APY in June. This increase may seem minor, and it is, but it is the most sustained increase we have seen in deposit rates since the middle of the financial crisis in 2008-2009. Online savings rates did not join in on the party and fell slightly from 0.689 to 0.681% APY. Online savings accounts have been the bright spot of the last couple of years, retaining relatively high rates even while CD rates crashed. If CD rates continue to rise it seems likely online rates will rise with them.
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All signs point to the economy gaining momentum through the end of this year and into next year. I do believe that this economic upturn is real and that rates will continue to slowly rise from this point (as long as the Federal government does not botch the recovery with bad policy).
The chart below shows the trend in average rates since October 2012.
Top Rate Recap
During this period, top savings and CD rates stayed pretty much status quo.
- Online Savings: AmTrust Direct dropped its rate from 1.05% APY to 0.80% APY, ceding the top spot among nationally available online savings accounts to GE Capital Bank at 0.90% APY.
- 1 Year CD: Nationwide Bank holds the top spot at 1.06% APY with a $100,000 minimum balance. GE Capital Bank is right below it with a 1.05% APY rate and a smaller $500 minimum balance.
- 3 Year CD: Last month, the best rate was 1.30% APY but Salem Five Direct is offering a 3-year CD that pays 1.50% APY.
- 5 Year CD: iGoBanking.com continues to offer a 2.05% APY CD while EverBank offers a 2.04% APY CD.
- Rewards Checking: Hope Credit Union and Money One Federal Credit Union both 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.
It's possible to find even better rates at local banks and credit unions (especially for CDs). You can search for better local rates here.
Online Saving and CD Spread
The difference between average 1 year CD rates and average online savings rates continued to gradually decline from the high it achieved in May 2013. On average, online savings account rates pay 0.330 percentage points more than 1 year CDs, up from 0.23 percentage points more at the beginning of last year but down from the spread's high of 0.344 percentage points in May. In addition to paying more than 1 year CDs, online savings rates pay almost the same as 3 year CDs. Despite the fact that online savings rates have lost some ground to 1 year and 3 year CDs, in a rising rate environment, it makes more sense to stay liquid with an online savings account than to lock money into a low rate CD. If the spread declines dramatically then this may be worth revisiting.
General rate environment
It's clear that longer-term rates want to run. Five year CD averages increased by 18 basis points and the rate rise appears to be accelerating. The increase in rates is also filtering down to 3 year and even 1 year CDs.
The Fed is the single biggest driver of rates at the moment and the lack of clarity about who will succeed Ben Bernanke as Chariman has thrown the markets for a loop. Larry Summers was thought to be more liable to raise rates sooner rather than later while Janet Yellen, now the leading candidate, is more prone to stick with current Fed policy. Either way, a growing U.S. economy will make it unlikely that rates will be able to go back down. That is not to say rates will spike up significantly. For deposit accounts, I expect the way up for now will be as gradual as the way down has been for the last three years. Depositors waiting for CD yields of 5% will still have a wait of years while the U.S. economy fully deleverages and heals from the financial crisis. My best guess is it will be sometime in 2017 before we see a 5% CD.
So if we look at the scorecard:
- Taxes: Increasing - drag on growth. Stable.
- U.S. economic growth: Slow to moderate. Improving. A protracted fight on the debt ceiling could hit growth and lower rate gains.
- Europe and the world: Europe leaving recession; Japan strong growth; developed world slowing but still growing. Overall, world picture is improving. Improving.
- Technology: Other than fracking, no innovation that seems capable of spurring growth at the moment. Stable.
My outlook: Savings and CD rates have stabilized and will not fall significantly lower. Long term rates will continue to drift up and short term rates may rise slightly. The Fed will increase the Federal Funds rate within the next 12 months. Savings rates will hover in the 2-3% range by the end of next year.
Savings Accounts or CDs?
The data continues to show that opening a savings account is a better bet than a 1-3 year term 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. While the premium for opening a 5 year CD over a 1 year CD has increased over the past six weeks, it is still only at 0.722 versus over 1 percentage point in October 2011. In a rising rate environment, it does not make sense to tie up money for 5 years with only a 30 basis premium.
Is it worth it to go long and open a 5 year? I don't think so any more. I think the 5 year CD rates are just too low and that you'd be better off putting your "safe" money into an online savings account and waiting for rates to rise. I spoke to one banker several weeks ago who said that "no one was investing in long-term CDs." Keep your powder dry.
For money you want to keep liquid, go with online savings accounts. They offer better rates than 1-3 year CDs and athough several banks have dropped rates in the past month, they have still offered decent rate stability over the past year and a half.
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.
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