Savings and CD Rate Update - October 26, 2012

Savings and CD Rate Update - October 26, 2012

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

My weekly recap of savings and CD trends as well as news that might impact rates going forward. Happy Halloween.

 

Savings and CD rate averages continued to decline last week, with the one year CD average falling from .428% to .425% APY. Online savings rates from the banks offering the top 30 nationally available rates remained steady at .428% APY. As the chart shows, average CD rates have headed inexorably lower while average online savings rates as followed by BestCashCow have remained somewhat steady over the past year.

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.

While the spread started the year at 1% or 100 basis points, it is now .793. 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, becasue economy looked stuck for quite some time, and because 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. 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.

Note that research I conducted and subsequently published in the Wall Street Journal (The Hunt for Higher Bank Yields) concluded that when considering where to deposit money, consumers will get the best savings account rate from an online bank, and the best CD rates from local, brick and mortar banks. That's why I've used online savings and money market accounts for this analysis.

Interest Rate Outlook

So, which way rates? In its FOMC statement released on October 24, 2012, the Fed reiterated that it plans to keep rates at 0% at least through 2015.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.  In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Inflation remains low, unemployment high, and economic activity subdued. In addition, reports to us from banks continue to indicate that most of them have more deposit money than they know what to do with. As the Fed drives down the yield on Treasuries by extending the maturities it holds, it will require banks to lower their deposit rates. Many banks are parking their excess cash in Treasuries. Eric Dash and Nelson D. Scwartz did a nice article on this for the NY Times: Banks Flooded with Cash They Can't Profitably Use.

There is hope, albeit dim, on the horizon for savers. The economy is growing with housing showing some strong gains in sales and prices. After four years of a housing crush we may be finally making some progress. Marketwatch also had an article (Countdown to Change at the Fed) on how the election might change the dynamic at the Fed. No matter who wins, Chairman Bernanke will most likely be departing soon and the new Chairman may be more inclined to raise rates.

Bloomberg published an interesting article entitled Sorry, U.S. Recoveries Really Aren’t Different by economists Carmen M. Reinhart and Kenneth S. Rogoff that discusses their research on how economies fare after a recession or depression brought on by a banking crisis. They examined similar recessions/depressions in U.S. history.

"So how many years did it take for per-capita GDP to return to its peak at the onset of the crisis? For the 1873 and 1893 (peak is 1892) crises, it was five years; for the Panic of 1907 (peak is 1906), it was six years; for the Depression, it took 11 years."

Past economic downturns suggest that it takes between 5-11 years to patch up the damage from a banking created crisis. We're now four years into our recovery. The "Great Recession" does not compare to the Depression so let's say 5-6 years is what it will take. That means by next year or 2014 we will start to see some real improvement.

My take: 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 weekend. Until next week...


The Cost of Saving

The Cost of Saving

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

The books have always told us the ideal macro story regarding how low rates bolster the economy by allowing borrowers to borrow and spend. But what’s the other not so ideal side of the story? If borrowers are the winners in this, then who are the losers?

Let us first start out with the highly glorified story, regarding the monetary policy of low interest rates. Theoretically, low rates make it easier for people to buy homes and cars. This in turn induces demand for other things like furniture, appliances, and car accessories, which really is a chain reaction that should boost a slow economy.

Additionally, the idea is that people will go out and spend more as low rates help them save on interest costs. On a bigger scale, low rates allow companies and businesses to borrow and invest in buildings and equipment among other things. Returns on these investments will then be worth more in the future if rates are higher than those of todays. Investment in businesses will also, hopefully, increase productivity levels and make the economy grow faster.     

Nonetheless, in recent years, low rates have also spurred a refinancing frenzy. Demand for refinancing US mortgages is high due to record low rates. The idea is that when interest rates fall and remain low, homeowners can refinance their fixed rate loans and borrow at a lower cost. However, not everyone is qualified for low rate refinancing due to tight credit standards. In many cases, it can be said that the people who need refinancing most cannot get it, so are low rates really helping those that need to be helped?

The answer is probably yes and no. Yes, as in sure it does allow borrowers to borrow at a lower cost and therefore invest and spur economic activity, which should then theoretically be good for everyone in the country. Another benefactor of low rates, not yet mentioned is our government. By keeping rates low, the government induces people to buy government debt such as treasuries, which makes it a winner.

Moreover, American debt has always been a safe haven for investors. The buying up of American debt by foreign investors have kept rates low to begin with, but the Fed by continuing to buy up government debt has managed to keep rates even lower. The government saves trillions of dollars in interest payments each year by keeping rates low. In fact the recent announcement of a so-called QE3 aims to keep rates low until mid 2015. Yet, rates are kept so low that savers are losing money because bank rates are lower than inflation. Finally, we get to the story of the savers.

Essentially low rates are chipping away savings and forcing those that are planning to live off their savings to retire later. Not only that, many who have retired are re-entering the workforce because they can no longer rely on their savings to sustain the cost of living.  A September 10, 2012 New York Times article noted that Dorothy L. Brooks, 65, who retired 10 years ago has decided to go back to work in a local school, and in her words, “I got hit a couple of years ago pretty badly in the stock market, so now my savings are weighted mostly toward bonds... Now both investments are terrible. And I can’t put my money in a money-market account because that’s crazy. That just pays nothing.” It’s literally as if people are paying the bank to put money in the bank.

In today’s low rate environment where inflation trumps savings rates, some people would rather hold on to their cash than put it in the bank. The same New York Times article also noted that Bill Taren, a retiree in Florida, would rather put cash at home, because then he can at least see the cash when he wants to.

Overall, the winners of this low rate story are the borrowers and the government, as the policy makes it easier for these people to borrow. The losers, nonetheless, are the older people, the retirees, and the savers. In the end, the question is, is the cost of low rates worth it? Does the story of low rates providing a boost to the economy still apply today?

Image: Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Select Banks Buck Trend and Increase Their Online Savings and Money Market Rates

Select Banks Buck Trend and Increase Their Online Savings and Money Market Rates

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

Several online banks have increased their online savings or money market rates in the last six months. Is this a trend or an anomaly?

Over the past four years, the trends in savings and money market rates have been pretty consistent – down. Week after week we’ve watched banks drop their rates. But in the last several months, a number of banks have reversed that trend and actually increased the rate they pay on their savings and money market accounts.

Among the rate increases we’ve seen are:

  • American Express Bank increased the rate on their savings account from a low of .75% APY in the first quarter of 2012 to 0.90% APY today.
  • ableBanking recently increased their rate from .85% to .90% APY.
  • SallieMae Bank increased the rate they pay on their savings account from .90% to 1.00% APY.
  • In March 2012, EverBank re-started their bonus rate of 1.05% on all new savings and checking accounts for six months. Over the summer they increased the bonus rate to 1.25% for six months.

I reached out to these banks for comment and received a response from Debby Hohler at Sallie Mae, who wrote that: “We continuously evaluate our rates to ensure our FDIC insured savings products are highly competitive, providing value to our customers and a mechanism to fund for our financially responsible private student loans.

To translate, they need the money to fund their student loan business. Deposits have become the most stable, least expensive way to fund a business, and financial institutions that are growing often need more deposits to lend out.

Despite the encouraging rate increases from these banks, don’t expect to see wholesale increases in rates over the next year. Savings rates from local banks and CD rates continue to fall. And while the top online rate in July was 1.25% APY it is now down to 1.05% (a savings account from CIT). We expect the Fed to keep rates at or close to 0% through 2014, if not longer. With job growth anemic, it appears that rate increases are the exception rather than the norm.

As local bank savings rates continue to drop, the online savings rates continue to remain the most competitive option for savers. While local banks often offer more competitive CD rates, especially in longer terms, our data shows that online banks offer the best savings and money market rates. According to the BestCashCow database, only 14 brick-and-mortar banks and credit unions out of over 13,000 beat the best online savings rate.

Image: Image courtesy of cuteimage at FreeDigitalPhotos.net