The economy is on a see-saw. One day we hear some good news, the next day we hear bad news. Consumer confidence is up but manufacturing growth is down. This up-down pattern looks likely to last for some time. The good news is that overall, the economy continues to grow, although slowly. It is this slow growth which is contributing to the continued decline in bank rates and continues misery for savers.
For the first time in over 70 weeks, average one year CD rates did not decline week-over-week. Average one-year CD Rates held steady at 0.361% APY. Will they continue to hold here? Doubtful, but the rate of decline for all CD products has slowed over the past four months. Three year average CD rates dropped from 0.720% to 0.718% APY. Five year average CDs dropped to from 1.058% to 1.055% APY. Online savings rates held steady for the second week in a row at 0.702% APY. There are two important pieces of information to consider. First, while rates continue to fall, the rate has slowed as you can see on the chart below. Second, online savings account rates and 3 year CDs pay virtually the same. In several months, I predict online savings accounts will pay more. You would now be better off opening an online savings account than a 3 year CD. While rates may continue to fall, I just don't see the benefit of locking money into a 3-year CD when there is a more flexible option with online savings accounts that pays virtually the same.
Top Rate Recap
Averages don't tell the whole story. Top
- Online Savings: AmTrust Direct retains the top spot at 1.05% APY.
- 1 Year CD: Two banks retain the top spot at 1.05% APY.
- 3 Year CD: CIT Bank, and Barclays Bank Delaware offer a 1.35% APY.
- 5 Year CD: Barclays Bank Delaware, and CIT Bank offer 1.75% APY.
- Rewards Checking: Hope Credit Union and Money One Federal Credit Union both have the top rewards checking rate of 3.01% APY for balances up to $10,000. Both credit unions are open to members from across the country.
Local banks and credit unions often offer better rates (especially for CDs).
Check 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. On average, online savings account rates pay 0.341 percentage points more than 1 year CDs, up from 0.23 percentage points more at the beginning of last year and approaching the spread's high of 0.344 percentage points in late January. This number didn't change in the past week as both online savings and CD rates remained steady.
General rate environment
As I mentioned in the first paragraph, econonic news continues to see-saw between positive and negative. On the positive side:
- Housing price appreciation his a seven year high last month according to the Case-Shiller Home Price Index.
- Consumer spending rose by a 3.4% annualize rate in the first quarter of 2013.
- The stock market continues to hover near all-time highs.
- Consumer confidence is at a 6 year high.
The negatives include:
- Manufacturing contracted in May, removing one potential driver of economic growth. The decline was unexpected.
- Job growth of the last few months in the 100,000 - 150,000 range is in the right direction, but not enough to bring the unemployment rate down to 6.5% anytime soon. That is the number required by the Fed before they say they will consider raising rates.
- GDP growth of 2.4% in the first quarter of 2013 is too slow to stimulate higher interest rates.
My outlook: Savings rates will continue to drift lower for the next 7-13 months before beginning to move higher. How high and how fast they move will depend on the level of local, state, and federal taxes and cuts; 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.
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. As the chart shows, the premium for opening a longer-term CD has eroded significantly and continuously over the past year. While the premium for opening a 5 year CD over a 1 year CD was 1 percentage point in October 2011, it now stands at .697 percentage points. The CD yield curve has flattened considerably over the past 24 months.
Is it worth it to go long and open a 5 year? If you don't need the money, it's probably okay. Rates may begin to rise in the next year but they probably won't shoot up. Inflation looks to remain tame. There is also the chance that we go Japanese and rates continue to decline, bottom out, and stay low for the next 5-10 years. In that case, a 5-year CD today would look good. I don't expect that to happen, but it could.
For money you want to keep liquid, go with online savings accounts. They offer better rates than 1-3 year CDs and athough several banks have dropped rates in the past month, they have still offered decent rate stability over the past year and a half.
If you want to take advantage of the higher rates on longer-term CDs, look to open them at local community banks. BestCashCow research has shown that community banks and credit unions offer the most competitive rates on longer-maturity CDs. Otherwise, you'd be better off keeping your money liquid in an online savings account.
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.
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