Savings, CD, and Mortgage Rate Trends

CDs and Online Savings Rate Trends

The graph above shows how the average rates for national bank-offered 5-year, 3-year, and 1-year CDs have trended over the last several years. It also shows how average online savings and money market rates have trended over this time. Average online savings rates have stayed close to the average bank-offered 3-year CD rate, even moving above the average 5-year CD rate briefly in 2019. Had you had the ability to foresee the pandemic and the resulting actions of the Fed in 2019, it would have been a great time to lock into a long-term CD. But, this graph also underscores the importance of checking online savings rates before committing to a long-term CD at your local bank!

The graph also demonstrates a clear trend in average savings rates through the life of the recovery as we came out of the 2008-2009 recession. Average rates for each of the products were falling until July 2013. After rates have stabilized, we saw increased CD rate offerings in 2014 and 2015 as the market began to anticipate the Fed's move to raise rates towards the end of the decade. If the economy continues to strengthen and the Federal Reserve raises rates as is currently projected (at least 3 times in 2022 and 3 times in 2023), depositors may be well served to remain in online savings accounts instead of CDs for the next two years.

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Spread Trends between 5 Year CD and 1 Year CD Rates

The chart above shows the difference in rate between average 5-year CD rates and 1-year CD rates. So, for example, in October 2011, 5-year CDs paid, on average, 1.01% more than 1-year CDs. That spread narrowed and fell below 60 basis points in 2019. During the pandemic, the spread disappeared. As a result, long-term CDs are not attractive at all, but they may become more attractive should the spread widen as the Federal Reserve raises rates in 2022 and as the market begins to anticipate further increases. The spread could also widen due to the Fed's withdrawal of liquidity and its tapering of asset purchases. At some point after the spread has widened significantly, long-term CDs could make sense for depositors, if we should see the possibility of a recession and of the Federal Reserve could begin to cut the rate in future years.

Depositors should always aim to receive as high a premium as possible to open a longer-term CD to compensate for the longer period of illiquidity. Those depositors valuing liquidity will want to remain in short-term CDs products online savings accounts until the spread widens substantially (except perhaps during those periods where they expect substantially lower interest rates in the intermediate term).

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Spread Trends between Online Savings and 1 Year CD Rates

The chart above shows the difference between average online savings rates and average 1-year CD. In October 2011, average 1-year CDs paid 23.4 basis points more than average online savings accounts. Just prior to the Federal Reserve reversing course and cutting rates on July 31, 2019, the spread increased to almost 1 full percentage point, making the premium in one-year CDs more attractive than it had been in over a decade. The pandemic and the Fed's emergency actions in 2020 caused the spread to become very narrow and it remained very narrow through 2021. As a result, there has not been much for depositors to gain by locking up their money even for short periods. As we get further into 2022 with rates rising and with the anticipation of further rate rises in 2023, depositors should expect to see short term CDs begin to offer an attractive premium for locking up their money (and, in a rising rate environment, they should not lock up their money until they see such a premium return).

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Mortgage Rate Trends

The chart above shows the rate trend for 30-year fixed rate mortgages, 15-year fixed rate mortgages, and 5-year ARMs. 30-year fixed rate mortgages, the most popular mortgage term, fell to an all-time historic low in December 2012 due to the Fed's Quantitative Easing. The 30-year product, as well as 15-year fixed rate mortgages, retested these all time lows during 2016. The average rates on all products moved higher through 2018, but pulled back in 2019 as the Fed lowered the Fed funds rate three times. Rates then fell further follow the emergency Fed actions in 2020.

Comparing average rates across these different mortgage products allows borrowers to see if one product is available at a discount over another. Since mortgage rates are based on indices as well as fees and economic conditions, the average rates across different products will not always move in tandem.

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Online Savings and Money Market Average