Savings and CD Rate Update - February 12, 2013

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

Average bank rates trending down. Top savings account rate steady at 1.25% APY while top rewards checking at 3.51% APY.

We've entered the second week of February and bank deposit rates are following the pattern I expected. They continue to gradually come down, following the lead of the Fed's 0% rate policy. New week, same story. Average one-year CD Rates dipped from .394% to .392% APY. Three year average CD rates dropped from .776% to .774% APY. Five year average CDs dropped to 1.125% APY from 1.130%. Online savings accounts were a lone bright spot, rising from .724% to .728% APY.

Looking beyond averages, the top rates continue to remain firm. That's important. While averages are good for directional information, savers don't invest in averages, they invest in actual rates. Some top rates are:

Local banks and credit unions often offer better rates (especially for CDs) than online banks so be sure to check them out. View local CD rates in your area.

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. The spread still remains very elevated. On average, online savings account rates pay .336 percentage points more than 1 year CDs, up from .23 percentage points more at the beginning of last year.

General rate environment

The government and private sector released very little economic data this past week. My forecast remains unchanged.

My outlook: Savings rates will continue to drift lower for the next 10-16 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.

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.
  • Local, state, and government cuts and tax increases are going to slow the economy. Even if sequestration is avoided, government at all levels is cutting back and raising taxes. At this point, it looks doubtful that businesses and the consumer will be able to make up the difference (especially with rising taxes).

Potential positive Black Swans (unforseen events that could skew the forecast). Read my article from several weeks ago 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 10-16 months.

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 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 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.


Savings and CD Rate Update - February 4, 2013

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

Savings and CD rates continue to drop. Top national CD rate at 1.135% APY. Guess the top CD rate five years ago.

Savings rates and CD rates both dropped this week, continuing a five year trend that started after the onset of the global economic crisis. Average one-year CD Rates dipped from .395% to .393% APY. Three year average CD rates dropped from .780% to .776% APY. Five year average CDs dropped to 1.130% APY from 1.135%. Online savings accounts took a sharp drop this past week after staying stable for the past five months, moving from .738% to .724% APY. For online savings accounts, that represents the lowest rate since August 2012.

Five years ago, the top banks on average paid:

  • 5% APY on online savings accounts.
  • 4% APY for a 12-month CD
  • 4% APY for a 36-month CD
  • 4.8% APY for a 60-month CD

Times have changed.

Despite drops in the averages last week, the top rates remained the same. This is more important because savers don't deposit money using averages. The top nationally available rates are:

Local banks and credit unions often offer better rates (especially for CDs) than online banks so be sure to check them out. View local CD rates in your area.

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. After hitting a new high several weeks in a a row, the spread dropped a bit to .343 percentage points last week and then took a steeper drop to .33 percentage points. That's still relatively high. On average, online savings account rates pay .33 percentage points more than 1 year CDs, up from .23 percentage points more at the beginning of last year.

General rate environment

Last week we saw the Yin of the Yang. While the economy seemed to gain some momentum in the previous couple of months, the data from last week confirmed that the growth is slow and not enough to alter the unemployment picture. In fact, according to data last month, the economy unexpectedly shrank last quarter. GDP dropped at a .1% annual rate. The unemployment rate also went in the wrong direction, rising from 7.8% to 7.9%. This is significant because the Fed has stated that it will not raise rates until unemployment falls to 6.5%. The last piece of negative news was the drop in consumer confidence 66.7 to 58.6. The problems in Washington D.C., tax increases, cuts in government spending, and the impact of Hurricane Sandy conspires to make the nation less optimistic.

One positive piece of economic data is that housing prices rose by the most in six years according to the S&P/Case-Shiller index.

None of this changes my forecast that deposit rates will continue to gradually move lower in 2013. My core 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, although 2012 ended with negative growth. If growth doesn't rebound in the first quarter of 2013, we have a problem.
  • 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.

I'd add one other factor. Local, state, and government cuts and tax increases are going to slow the economy. Even if sequestration is avoided, government at all levels is cutting back and raising taxes. At this point, it looks doubtful that businesses and the consumer will be able to make up the difference (especially with rising taxes).

All of this could change in an instant though if an unforseen positive or negative event occurs (Nassim Nicholas Taleb coined this term to describe an event that is a surprise, has a major impact, and if often only understood or explained after the fact). Read my article from several weeks ago on Black Swans and how they impact forecasts.

My bank rate outlook: Savings rates will continue to drift lower for the next 10-16 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.


Belmont Savings Bank Ups PlatinumBlue Savings Rate to 1.15% APY

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

Belmont Savings Bank has broken ranks with the majority of banks and increased the rate of its PlatinumBlue Savings account from 1.10% APY to 1.15% APY. That's one of the best savings rates in the country.

Belmont Savings Bank has broken ranks with the majority of banks and increased the rate of its PlatinumBlue Savings account from 1.10% APY to 1.15% APY. That's one of the best savings rates in the country. In the process of doing it, they also attached some additional requirements. To receive that savings rate, a depositor must also open a PlatinumBlue checking account that comes with a bevy of free features (free online banking and bill pay, free check images, free ATMs, free mobile deposits). The account has a $25 monthly fee that can be waived with one of the following:

  • Direct deposit
  • $2,500 average daily balance
  • 5 debit card transactions (pinned or signature)
  • 5 third party cleared checks per monthly statement cycle

PlatinumBlue Checking also has a $250 initial deposit requirement.

PlatinumBlue Savings is a tiered account and the rate depends on your balance level. The tiers and their respective rates are:

Tier 1: $10.00 - $100,000 - 1.15% APY

Tier 2: $100,001 + : .35% APY

If the requirements are not met on the PlatinumBlue checking account then the savings rate drops to .25% APY for any balance.

Both savings and checking accounts can only be opened in a branch. The offer is only valid to those customers who live near Belmont Savings in Massachusetts.

Belmont Savings Bank is a community bank with $820 million in assets. It's Texas Ratio of 3.04% is well below the national average of 18.73%. A low Texas ratio tends to indicate a financially sound institution.

For savers who don't mind changing their primary checking relationship, or who already have a relationship with Belmont Savings, PlatinumBlue might be a good way to get some extra yield. It's unclear how long the bank will maintain this high rate, so I don't recommend switching unless you are open to a longer-term relationship with the bank and the chance that the savings rate could drop significantly in the future.


ING DIRECT: Will it be a 360-Degree Change?

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

In June 2011, ING Group agreed to sell ING DIRECT USA to Capital One for $9 billion. Since then, many ING Direct’s customers have feared that their beloved bank would change. Beginning February 2013, the bank will be known as Capital One 360, but what other changes will come in association with this merger?

The ease of setting up an account, its web interface and bill paying features, the absence of fees and minimum balance requirements, and decent interest rates compared to its competitors have provided more than enough reasons for ING Direct customers to use the online bank. And while ING Direct’s interest rates have fallen considerably since the Great Recession, the current rates offered by the bank have remained competitive and therefore attractive for customers.

Capital One Bank has traditionally rather competitive money market and savings account rates without monthly service fees.  However, by contrast to ING Direct, it has never been a bank known for providing excellent rates and outstanding service. Nevertheless, in acquiring ING Direct and converting its name to Capital One 360, the bank has made the following pledge on the ING Direct website. "We’ll deliver real value. We’ll continue to be home to no-fee, no-minimum checking and savings accounts—with the great rates that we know are important to you."  

But the question remains if the bank will be able to keep this pledge, especially if rate cuts similar to the ones in October 2012 continue. At that time, the bank’s Orange Savings account rate fell 5 basis points to 0.75%, and its Electric Orange checking account also fell by 5 basis points across all deposit amounts (The rate for balances of $100K or higher, and the rate for balances between $50K and $100K are now at 0.85% and 0.80%, respectively). Additionally, all CD rates fell 10 basis points, with the 5 year CD being at only a mere uncompetitive 0.90% now.  

In addition to possible changes in interest rates, what other changes should existing customers expect to see? First, there’s good news for the frequent traveler. The bank has waived foreign exchange fees on debit card purchases outside the U.S, consistent with Capital One’s policy.  Second, with “On Us” checks, money will be made available sooner to customers. Checks (“On Us” checks) written from one ING Direct or Capital One 360 account and deposited into another will have next business day availability.  Third, all accounts will be covered by Capital One’s tighter privacy policy.

One significant note of importance is that customers with large deposits at both ING DIRECT and Capital One may lose FDIC coverage in May 2013.  Any customer whose balances across both accounts between the two banks will exceed FDIC coverage amounts on that date should reallocate their assets prior to May.

Now that the legal acquisition of ING Direct was completed on November 1, 2012, customers may see lower rates and a deterioration in service levels.  Overall, customers have continued to be loyal to ING Direct because of its competitive rates. But with more rate cuts like those in October and any slippage in service, and customers may begin to leave quickly and en masse.

 


Now That the Election Is Over, What Can Savers Expect Over the Next Year?

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

With Obama's re-election to a second term, Bernanke's job as Chairman of the Fed is now safe. Akin to what Bernanke's been doing, the Fed will most likely continue to keep rates low and print more money.

In September 2012, the Fed said it expects to keep short-term interest rates near zero until 2015, and to continue its Operation Twist policy to suppress long-term rates well into 2013.   In addition, the Fed is now undertaking QE3 through which it is pumping $40 billion each month into the struggling economy through mortgage bond purchases.

The arguments made for keeping rates low were due to concerns about high unemployment rates and “strains in global financial markets” and that low rates will stimulate more economic activity. In theory, in a low rate environment, consumers will be induced to borrow and to spend, but the economy has yet to recover its footing in a way that enables the Federal Reserve to abandon this policy.  Rather, unemployment is still at a record high and the economy really has not gotten much better.  Nevertheless, the Fed, by insisting to keep rates low, is bidding for some progression in the story over the next few years.

Many are concerned that the expansion of the Fed balance sheet as a result of its monetary policies will become inflationary. As of now, inflation has been in check due to the declining velocity of money with the public sector and corporations cutting back on debt. Public sector borrowing will most likely be further reduced in 2013 through spending cuts and tax increases, slowing the velocity of money even more, and helping to keep inflation in place.  

Even if savers are not worry too much about inflation at the point, what does a continuation of a zero interest rate policy really mean to them? Low rates mean that yields cannot go any lower, and with virtually no return, there is no reason to park any money in bonds. Eventually, all the money that the Fed is pumping into the economy and low rates for savers could result in still higher stock prices. 

Commodities too represent a particularly sensitive area in 2013.  As the Fed continues to print money in support of its quantitative easing policy, the dollar will most likely remain weak.  With Obama’s reelection, some pundits are calling for gold as high as $3,500 per ounce and silver over $100 per ounce by the end of 2013.   Yet, commodities too bear risks, and a significant collapse in China or India or continued weakness in Europe could cause them to fall dramatically.

Ultimately some savers will take more risk in areas like equities and commodities as low rates continue for a longer and longer period, but many savers will become accustomed to lower rates and make necessary adjustments in their expectations in order to safely get through 2013.


Savings and CD Rate Update - November 13, 2012

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

Savings and CD rate trends, the impact of the fiscal cliff on savers, and my weekly rate forecast.

Savings and CD rate averages continued to decline last week, with the one year CD average falling from .419% to .418% APY. Five year average CDs fared even worse falling from 1.204% APY to 1.196% APY. Online savings rates from the banks offering the top 30 nationally available rates remained steady at .732% APY for the seventh week in a row.

Election Impact on Savers

With the election over we can now look towards the fiscal cliff as the next big event that may impact the fortune of savers. Here are a couple of scenarios and some thoughts on how each one might impact savers.

  • We go over the cliff. Taxes will rise across-the-board, including on income from savings and CDs. As a result, the already meagre gains from money in the bank will become even smaller. As the economy slows from tax increases and spending cuts, the government will keep interest rates pegged at record low rates for an even longer period of time.
  • The cliff is averted via a temporary detour. Congress and the President decide that in this lame-duck period (for Congress) to bypass the fiscal cliff and put in a temporary respite from tax increases and budget cuts. This will maintain the status quo. Rates will remain low for an extended period of time (perhaps through 2016) on deposit accounts but no significant new taxes will be taken out of income.
  • A grand bargain is struck to avert the cliff. A grand bargain is potentially the best outcome for savers, depeneding on the contours of the deal. A compromise would show that the government can still function and boost confidence in the economy. Most of the compromises being discussed now would not increase income taxes on the vast majority of savers. So, increased confidence and little to no tax increase may result in higher rates in the medium term as the economy continues to grow and recover from the financial crisis of 2008.

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 .778%. 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.

Interest Rates

My rate prognosis depends on what happens with the fiscal cliff. The most likely scenario is that a temporary fix is put in place that averts a jump in taxes and cuts due to sequestration. Based on that, I believe that:

Rates will continue to drift lower for the next 12 months. After that, it's hard to tell. I suspect that rates may go up before 2015.

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.

Have a nice week. Until next week...