Savings and CD Rates Continue to Drop - Weekly Rate Update

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

Most savings and CD rates hit record lows last week. Average savings rates reached a new record low of 1.47% APY last week, down 4 basis point from 1.51% APY the previous week. Average one-year cd rates showed the largest drop, falling 10 basis points to 1.85% APY. Average three-year cd rates dropped four basis points to 2.63% APY. The only glimmer of good news were five-year CD rates which increased from 3.18% APY to 3.20% APY.

The two big news events over the last week were the Federal Open Market Committe statement, in which the Fed committed to keeping rates low for the foreseeable future and for kind've slowing its purchase of mortgage backed securties and President Obama's whopping $3.8 trillion budget.

The Fed, as it has for the last year, committed to keeping the Fed Funds rate pegged close to 0%. At the same time, the Fed said that it was beginning to slow its purchase of mortgage backed securities.

" To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets."

That's the way to sit on the fence.

I've been expecting mortgage rates to begin to rise with this announcement but the opposite has happened over the last month. After peaking at close to 5.2% in late December, mortgage rates have come down and are now once again below 5%. This is a gift for those that want to purchase or refinance a home.

Many still predict that as the Fed lays off the MBS juice, mortgage rates will begin to go higher.As I wrote last week, low rates are both a benefit and a boon. You'll have to decide if getting a low rate is worth the risk that your house will lose value once rates start to move up.

President Obama's budget is also front and center to our rate discussion. $3.8 trillion is a lot of money and the budget shortfall is expected to reach a record $1.6 trillion in 2010 with whopping deficits going out beyond the horizon. What does that mean? More issuance of Treasuries. Eventually the market will be flooded with US debt and unless corrective action is taken, which seems doubtful, we're all looking at longer-term interest rates.

Right now though, higher interest rates would be welcome news for the savers of the world.

CD and Savings Rates

Most savings and CD rates hit record lows last week. Average savings rates reached a new record low of 1.47% APY, down 4 basis point from 1.51% APY the previous week. Average one-year cd rates showed the largest drop, falling 10 basis points to 1.85% APY. Average three-year cd rates dropped four basis points to 2.63% APY. The only glimmer of good news were five-year CD rates which increased from 3.18% APY to 3.20% APY.

 

 

Savings,CDRateAnalysis

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts (a short duration deposit account) and 3 year CDs. As the chart below shows, the yield has been on the rise and is currently at 1.16. This is the second highest reading since we began compating this data. The yield ratio continues to mimic the Treasury yield curve, which is low on the short end and rises on the long-end.

SavingsandCDSpreadAnalysis

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising rate risk. CD laddering may be a good way to smooth out the return you receive from your CD portfolio. Several banks have come out with breakable CDs (First Commons Bank article) , that allow users to withdraw money penalty free, and still other banks are lowering the withdrawal penalty, as Ally Bank recently did, for removing money before maturity.


Compound Interest

Compound Interest

What is Compound Interest?
 
Albert Einstein, well known for being smarter than the average, once called compound interest "the greatest mathematical discovery of all time". However it’s not totally necessary to be as intelligent as Einstein (or even half as smart for that matter) to understand compound interest.
 
When you save money in a bank savings account or a CD, you earn interest on that money. The next year, you earn interest on both the original capital and the interest earned from the previous year. In the third year, you earn interest on capital and interest on interest earned in year one and year two. It goes on and on with no limits. And that, in a nutshell, is the seventh wonder of the world – compound interest!
 
The effect is most often described similarly to that of a snowball. If you stand atop a mountain and gather some snow into a ball, then roll it down the mountain, it gathers snow as it goes creating a bigger and bigger snowball. If your hill is steep enough you could end up with a very large snowball at the bottom!
 
While compound interest itself is a basic concept, there are several ways to maximize the amount of money you could be due. Here are five key points to keep in mind:
 
1. Start as soon as you can: The earlier you start investing, the more time you have for the effects of compound interest to accrue. A person who invests $200 a month from age 25 to 35 and then lets their investments grow is likely to have more money at age 60 than a similar person who invests $200 a month from age 35 to 59.
 
2. Small differences in return are crucial: While 1% might not seen like a lot, the difference between 6% or 7% over long time periods is gigantic.
 
3. Don’t disrupt the cycle: It’s important only to invest money and let it grow when you have no pressing need for it. While there is nothing wrong with keeping money in a bank account, the more time your money has to grow the more it will.
 
4. Don’t laugh off the small stuff: Contributing just $100 a month for 40 years at 12% will see you end up with close to $1,000,000 in savings.   And that’s just $100 a month.
 
5. Give it time: You must be patient. There is no such thing as a quick buck. Compunding takes time but the benefits are way in excess of the time costs.
 
A Practical Example

$20 000 invested at a compound rate of 15% for 30 years provides some astonishing results:

YEAR                                                                      AMOUNT
1                                                                                $23,000
2                                                                                $26,450
3                                                                                $30,418
4                                                                                $34,980
5                                                                                $40,227
6                                                                                $46,261
7                                                                                $53,200
8                                                                                $61,180
9                                                                                $70,358
10                                                                              $80,911
11                                                                              $93,048
12                                                                            $107,005
13                                                                            $123,056
14                                                                            $141,514
15                                                                            $162,741
16                                                                            $187,152
17                                                                            $215,225
18                                                                            $247,509
19                                                                            $284,635
20                                                                            $327,331
21                                                                            $376,430
22                                                                            $432,895
23                                                                            $497,829
24                                                                            $572,504
25                                                                            $658,379
26                                                                            $757,136
27                                                                            $870,706
28                                                                         $1,001,312
29                                                                         $1,151,509
30                                                                         $1,324,235

An investment of $20,000 turns into $1,324,235 after thirty years, without a single cent added.


Savings Rates Hit New Lows, CD Rates Flat - Weekly Review

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

Savings and CD rates continue to hover at pitiful rates. Average savings rates reached a new record low of 1.51% APY last week, down 3 basis point from 1.54% APY the previous week. Average one-year cd rates actually rose 3 basis points 1.95% APY. Average three-year and five-year CD rates remained steady at 2.67% APY and 3.18% APY respectively.

Last week was nother relatively quiet week in the markets. News was dominated by the devestating earthquake in Haiti as well as the battle over healthcare and the election in Massachusetts. I live in Massachusetts and never in my life have I seen so much campaigning. Usually Massachusetts receives little to no attention in national elections since the race is usually a foregone conclusion. Now, every twenty mintes the phone is ringing with an ad for one candidate or the other and almost every commercial is an election ad.

The stakes are large no matter who wins. Health care eats up 16% of the Federal budget and that number is expected to rise as the cost of healthcare continues to grow at 7-10x the rate of inflation. A friend of mine works in the benefits department of a major corporation and he told me that no matter what happens, the quality of healthcare is going down, or the price is going up. Companies can no longer afford to subsidize as much of the cost. Many of you have already seen it in high-deductible plans or plans with very expensive premiums. Expect this trend to continue.

Now, onto the rates.

CD and Savings Rates

Savings and CD rates continue to hover at pitiful rates. Average savings rates reached a new record low of 1.51% APY last week, down 3 basis point from 1.54% APY the previous week. Average one-year cd rates actually rose 3 basis points 1.95% APY. Average three-year and five-year CD rates remained steady at 2.67% APY and 3.18% APY respectively.

Savings,CDRateAnalysis

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts - the spread between savings rates and 36-month CDs. In some ways, this ratio is purer because it cannot be influenced by government debt, Fed Treasury purchase programs, and other attempts to manipulate rates. As you can see below, the ratio between savings accounts (a short duration deposit account) and 3 year CDs has 1.15. Savings and money market rates have dropped while 3 year cds have essentially stayed flat. The ration remains very elevated, mimicking the Treasury curve. We'll be watching how the ratio develops over the next month to see if it provides any additional clues to the state of the market in 2010.

SavingsandCDSpreadAnalysis

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. Many depositors may be willing to lock money away for 5-years at close to 3%. To me that's just not enough of a return for that period of time. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.