Starting to Look Like Japan - One-Year CDs Offer Small Upside, But Miniscule Risk

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With long CD rates compressing and yields in savings accounts enigmatic, this is a good time to look at one-year CDs.

Global markets are continuing to reward risk and to provide very little yield in risk-free assets.  While rates were expected to go up in 2016, we have seen a decline in long-term rates in the US (caused by a dramatic drop in long term rates in Europe).  We have also seen rate compression in risk free assets (US Treasuries and now CDs).  In 2014 and 2015, 5 year CDs offered rates as high as 2.50% APY.  Now, even the best rates are closer to 2.00% APY (see the best rates here).  Savings rates are barely holding constant with only a couple of the leading online rates holding above 1%.  It seems that we are all starting to look like Japan where savers have been rewarded with extraordinary low interest rates for decades.

Find all of the best savings rates – online and locally – here.

As we look at a continuation of what has become a virtual zero rate phenomenon, a handful of banks are offering 1 year CD rates at or above 1.25%.  In fact, the best CD rate available online today is 1.35% with a $5,000 minimum deposit.  If you have money that you are resigned to keeping in cash and that is earning 0.90%, you can easily pick up an additional 50% return by getting into a one-year CD.

Ok, I hear you.  I know that the actual pick up here is pretty low.  In fact, you would need to move over $222,000 from an account earning 0.90% to a CD earning 1.35% just to make $1,000 more over the next year.  And, that $1,000 is going to be fully taxable at the federal, state and local levels.  However, if savings rates do not rise and you continue to earn 45 basis points more by being in short tern CDs, the additional gain becomes real.  As the Japanese have found, when waiting for savings rates to rise, one year quickly turns to two, and two to 10 or 20, and the value of the additional interest, when compounded, does become meaningful.  Using BestCashCow’s savings booster calculator makes this clearer.

Rates may be going up, but it is clear that they are not going to be rising very fast.  If you have money that you cannot keep in risky assets (such as the stock market) and that you are unlikely to need for the next year, it may be time to start shifting into 1-year CDs.  If savings rates were to spike or if you need your money for an unforeseen expense, you can ordinarily get it back by paying a modest early termination penalty (Sallie Mae, Colorado Federal and BAC Florida all have penalties on their 1-year CDs that are only 3 month of interest).  

See the best one-year CD rates - online and in banks and credit unions near you - here.


HSBC Action May Signal Coming Competition in 2016 for Savings Dollars

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HSBC Bank's recent letter to those who opened promotional savings accounts over the summer may finally usher in an era of more competitive savings rates from major money center banks through their branch networks.

Over the summer of 2015, HSBC aggressively advertised a "Promotional Premier Savings Account" designed to attract new depositors and new money to their branch banking system.  As featured on BestCashCow, depositors were offered a promotional rate of 1.50% which was guaranteed until January 19, 2016.

Since the 1.50% rate was (and is) better than even the best online savings rates, HSBC attracted alot of new capital through this offer.  As January 19, 2016 is approaching, these same depositors were probably preparing to move their savings out of HSBC to one of the leading online savings accounts at that bank's ordinary savings rate is currently only 0.15% on deposits over $100,000 (and 0.10% on deposits over $25,000).

In order to avoid losing the deposits that it courted so aggressively, HSBC has sent a letter to those who opened these accounts over the summer notifying them that from January 19, 2016 onwards they will receive 75 basis points more than the standard HSBC Premier Savings account.  The letter further agrees that HSBC will provide at least 30 days advanced notice of any subsequent decision to remove the 75 basis point incentive.

As a result of this action, those depositors who took advantage of HSBC's summer promotional offer who keep over $100,000 at HSBC will be earning 0.90% going forward until further notice.  This rate of course is not anything to write home about, and is currently 15 to 20 basis points below the best online savings rates available.  However, it offers the hope that 2016 will finally bring more competition from other major banks with large branch networks to attract new capital and keep capital.

Find the best local savings rates where you live.


Salem Five's OSA - Competitive Rate, MA DIF Insurance, Some Challenges

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For several years, Salem Five's online savings account has been one of the most competitive online accounts available. Many of our readers suggest that we remove it because it has features that are more onerous and difficult to understand than some of the other savings accounts listed on the site. BestCashCow.com recognizes these issues but feels that it Salem Five needs to be listed among the best yielding savings accounts because these issues can be worked around.

Salem Five is a Massachusetts-based financial institution that has been a competitor in the online savings space for many years.  Its online savings rate today stands at 1% and that is among the most competitive online savings rates.  Because Salem Five is a Massachusetts bank, it is covered under the Massachusetts DIF policy that insures each depositor’s accounts, regardless of state of their residence, to a maximum of $1 million.

Over the last several years, two series of problems have become evident with Salem Five Direct’s online savings accounts.  These problems have been highlighted to BestCashCow.com by our readers and we feel that they still need to be addressed by Salem Five.

First, promotional rates are higher than the rates in the post-promotion period and the rates in the post-promotion period are not transparent on the face of the site.

BestCashCow.com considers the practice of offering a rate dramatically above market to be a bait-and-switch tactic and warns depositors of this tactic.

Salem Five’s post-promotional rates have always been 5 to 10 basis points below its promotional rates which tend to be the only ones listed on its website.   Salem Five should be more transparent about its promotional and post-promotion rates.   Depositors simply should not be required in the post-promotion period to log in to their account weekly or monthly to find out how much below the advertised promotional rate they are earning.

While Salem Five now seems to have suspended, at least temporarily, the practice of issuing promotional rates, we have always found that their entire promotional savings rate thing played into the hands of whoever was writing the script for the Ally Bank television ads.

Second, transfers out of the Salem Five Direct Savings Account are not free and severely limited in ways not consistent with the US online savings account market

When using Salem Five Direct’s online banking interface, depositors are limited to $5,000 per transaction, $5,000 in aggregate per day; and $20,000 in aggregate per calendar month.   Each outbound ACH transfer initiated through Salem Five has a $3 charge.  These limits are very onerous - actually ridiculous.  Using Salem Five’s website, it would take a year and cost $144 to move $240,000 out of Salem Five Direct.  Under no circumstance do these limits and charges match the market practices for online savings accounts.  Their very existence is material to depositors and perspective depositors, and they are not cardinally disclosed on Salem Five's website.

Allso not disclosed on Salem Five’s website is the very fact that the market creates a work-around for the limits and charges.  By initiating your ACHs out of Salem Five through another online bank account, such as CIT, Synchrony or Ally, you can avoid Salem Five's transfer limits and fees.   Your Salem Five Direct account can easily be set up and confirmed as an ACH transfer account using their routing number (211370558) and your account number.  

The feedback that we have received from BestCashCow.com readers that Salem Five Direct has drawbacks that other online banks do not have is entirely correct.  We think it is within BestCashCow’s role as the most comprehensive and informative U.S.-based website on personal savings issues to make consumers aware of the existence of Salem Five’s products.  We also think Salem Five needs to take active steps to provide its customers with better rate disclose and match market practices regarding online ACH transfers. 

Compare the best online savings rates here.


Citibank and Bank of America Merrill Lynch Make Earning No Interest Sexy, If You Also Hold Their Travel Credit Cards

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In this low interest environment, the major money center banks have been offering next to nothing in interest for years. Citibank and Merrill now give you a reason to keep your cash with them.

It is tough to earn next to nothing in a savings account and be excited about it.  Provided you keep $100,000 in total assets with Merrill Lynch or $50,000 in cash with Citibank, you can now make up a lot of lost interest in the form of travel rewards by pairing your account with credit cards that extend certain benefits for preferred customers.

The Bank of America Travel Rewards card offers 1.50% cash back in the form of a direct credit on travel expenses for each dollar spent on the card.   While this offer does not compare favorably to other travel and rewards cards on its face (see the best cards for spend here), the cash back amount is augmented by 75% for those holding balances over $100,000 at Bank of America, Merrill Lynch or Merrill Edge accounts (whom the bank designates as Platinum Honors for credit card purposes).  The 75% augmentation takes the cash back percentage to 2.65%.  While BestCashCow’s own rankings indicate that other travel and rewards credit cards offer value on spend in excess of 3%, the 2.65% return on spend is well in excess of what is offered through any cash back program.  It is also highly desirable for those seeking maximum flexibility in how they redeem spending credits that they have earned through their credit cards as it does not require membership in an air miles or hotel point program, or trying to find those rewards through the program that maximize redemption value.   You’ll also get 10,000 points – worth $100 – just for signing up for the card.

While qualifying for Bank of America’s Platinum Honors status does not make sense if you are holding $100,000 in cash at virtually no interest, it can make a lot of sense to hold and use this card if you qualify through holding equities, debt instruments or other securities in a Merrill or Merrill Edge account.

Full details on the Bank of America program and what is required to qualify for Platinum Honors status are available here.

Citibank offers the Prestige Card that delivers 3 points for travel (including gas), 2x for restaurants and entertainment and 1x for everything else.  BestCashCow.com rates this card and the Citi ThankYou Premier card, its first year no fee sibling, as outstanding travel and rewards cards for recurring spend and for their 50,000 point sign up bonuses.   In particular, BestCashCow.com sees at least 3 cents per point in value on Singapore Airlines Krisflyer, but points can also be worth 1.6 cents each when redeemed against charges from American Airlines.

For a $450 annual fee, the Prestige Card offers an array of benefits including a $250 annual air travel credit (which over two years more than covers the fee), entry to American Admirals club, global entry reimbursement, a fourth night free on consecutive hotel stays and four rounds of golf that the regular ThankYou Premier Card does not offer (read more on the difference between the two cards here).  For those with CitiGold status (ordinarily $50,000 in account balances), the points earned through the Prestige Card are augmented by 15% so that travel earns 3.45 points, restaurants earn 2.30 points and everything else earns 1.15 points.  Moreover, the annual fee is reduced to $350 and the signup bonus increased to 60,000 points (although it should be noted many non-Citibank account holders have reported getting these benefits simply by applying for the card in a branch).  The reduced fee and the increase in points make an already outstanding travel and rewards card still better for Citigold members.

Full details on qualifying for CitiGold are available here.

The augmented credit card rewards that Bank of America and Citibank are offering to their cardholders who maintain qualifying accounts are interesting.  However, before account holders at these banks rush into these cards, it makes sense to run the numbers, comparing these cards with the rewards that you might accumulate through other credit cards.  If you are qualifying by holding cash, you should also factor in the loss of interest you would otherwise be earning.  Leading online banks pay over 1% more in interest in the savings accounts (see the best rates here). 

Compare travel and reward credit card sign up bonuses.


Greek Default, Puerto Rico Debt Service Problems to Have Little Effect on US Rates

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Greece lies on the brink of collapse. Puerto Rico debt obligations are all going to be restructured. Even if the worst case were to materialize (both default), US interest rates are not headed for a dramatic decline or even a retest of recent lows. They are headed up.

The news is pretty bleak, but I still don’t believe that Greece will default.  I certainly do not believe that Puerto Rico will default.  In Greece, the institutions that hold these bonds (now German banks and US hedge funds) are too sophisticated to force a situation where they receive nothing, than to allow a situation where they recover a restructured bond.   The voting electorate is also too smart to vote for a continuation of the utter chaos they will see this week.  Same will be true in Puerto Rico.  Everybody will back away from the brink. These places are simply not analogous to Russia or Thailand in 1997, or Argentina more recently.

If we were to see a Greek default, there will be increased dislocation and volatility in the equity and debt markets.  The reality however remains that Greece is such a small part of the European economy, it will not have a major impact on anything.  Austerity in Europe will probably continue, but the US will continue its path towards pulling out of the low interest rate environment that we have been in.  In short, Greece is just to small and inconsequential and events there are not going to cause the rush to safety in the US that would drive long term bond yields back down.

I predict that interest rates will continue to rise towards a more normalized level with Janet Yellen and the Fed still on track to raise interest rates in September or October.   The 10 year Treasury will end the year closer to 3% than to 2% and savings rates will continue to move up gradually.  The bond bubble will begin to burst and this is a good time to favor cash over bonds.

Find the best savings rates here.


Time to Get Serious About The Bond Bubble Bursting

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As 10 year bond yields have gone from 1.80% to 2.15% over the last month, Janet Yellen, Bill Gross, Jeffrey Gundlach, Scott Mather and many others have made statements indicating that the bond bubble may finally be ready to burst. It is time to get serious about the potential consequences of the bond bubble bursting.

In 2013, the 10-year bond went to a 3.05% yield briefly.   Many traders who were heavily long fixed income got really hurt when this happened, but the general public was spared from the consequences of a end of cheap money as cash from global markets began pouring into the US to drive rates back down.

At this point, many experts are indicating that the current 10 year yields are well below where they should be at this point in the economic cycle and they should begin to move off of the unnatural post-recession lows that we have seen for the last 6 years in anticipation of a change in Fed policy.  Janet Yellen, herself, has indicated that the cycle of unnaturally low interest rates needs to come to an end and that when it does long term rates may spike higher.  High profile observers – including Bill Gross, Jeffrey Gundlach and Scott Mather - have all been quoted in mainstream financial media over the last several days as suggesting that as the Fed begins to raise rates, long bonds will go up more quickly.   Even if the rise in the Fed Funds rate is extremely slow and deliberate, 10 year rates will wind up back to 4% or 5% over the next year or two.

This is a good time to confront reality.  If 10 year rates were to go back to 4 or 5% (or 6 or 7%), the discounted present value of that cash produced by instruments that you may hold will become less valuable (i.e., will become discounted at a higher rate).   The value of long-term municipal bonds will fall.  Corporate bond spreads will widen, not narrow, and the value of corporate (high grade and high yield) bonds that you hold will fall sharply.  The value of your emerging market bond and EM bond funds will fall dramatically, as will the value of any preferred stock that you may hold (including Public Storage’s preferred stock that I have previously recommended). 

I do not pretend to be a real estate or a stock market expert, but it would seem that your real estate and equities will impacted as well.  Real estate values in frothy markets like New York, San Francisco and Miami may fall from their bubble levels as mortgage rates rise.  Stocks – including Blue Chip stocks such as Disney, Procter & Gamble, McDonalds and Coke – that trade at extremely high, above-market multiples of earnings against anemic growth will see a sharp correction.   (The broader market however may move higher and fast growing, dynamic growth stocks with large cash stockpiles, very low PE ratios, and PEG ratios below 1 such as Apple and Gilead should be virtually unaffected and continue to move dramatically higher).

This is probably not the time to sell your home or exit the stock market.  But, it is a good time to think about some key things you can do to protect yourself from a rise in interest rates.

1.  Think about raising cash, selling your bonds (except for those nearing maturity), bond funds, bond like instruments, and stocks with unsustainable valuations.  Earning 1% a year over the next two years is a better outcome than losing 20% or more of your principal over that period.    If you still aren’t earning 1% on savings, see this list of the highest yielding savings accounts.

2.  Put money in CDs.  You can earn 2.25% on a 5 year CD from Synchrony or Barclay’s Bank that allows only a six month interest penalty for early withdrawal.  As this article discusses, that is a pretty reasonable risk-reward scenario.  Alternatively, put your money in a CD that offers a better rate than cash and provides the opportunity to raise your rate should rates rise.  CIT Bank’s family of RampUp CDs are not only among the highest yielding CDs, but offer this flexibility.

3.   Invest in structured notes that are geared to pay out more money as interest rates rise.  I have written extensively about these notes on BestCashCow.  My favorite notes are those that pay a multiple of the spread between the 2 year and the 30 year Treasury (or Constant Maturity Swap) rates.  While this notes usually require assuming the credit of a bank, such as Chase or Morgan Stanley, they are currently paying around 6% and would move to paying their maximum distribution amounts of 9% to 10% should the interest rate spread widen.   These notes may not always be offered in primary markets and can be difficult to find in secondary markets.  Read my earlier articles on these notes here or here.

Happy investing.