CD and Savings Rates Flat, Mortgage Rates Dow - Weekly Rate Update

This week the discussion continued about whether the Fed's 0% rate policy is leading to the creation of asset bubbles. Chinese and Japense central bankers went on record as stating that the Fed's policy has already led to asset bubbles in Asia that could create global imbalances. In particular, they were referring to the carry trade, in which investors borrow money in a country with low interest rates and invest it in a country with strong asset price growth or higher rates of return. "Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”….

Bill Gross from Pimco probably got it right when he said:

"The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks . Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until. To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements. The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds."

The only good news for savers is that inflation for goods and services remains relatively subdued. The CPI rose by .3% in October. The index has decreased by .2% over the past 12 months. Leading the increase in October was energy and automobiles. While energy prices will probably continue to rise, look for auto prices to fall back now that cash-for-clunkers is over and the government is no longer subsidizing car purchases. Overall though, there is nothing on the goods and services inflation front that would push the Fed to raise rates.

The only inflation seems to be in assets and Bernanke doesn't believe this presents a problem at the moment.

CD and Savings Rates

CD and savings rates showed virtually no movement over the past week. The average savings rate according to the BestCashCow rate tables dropped one basis point to a new low of 1.62% APY. That's down from 1.70% APY a month ago. CD rates have mostly stabilized. The average one year CD rate is now 2.08% APY. That's up slightly from the last week and virtually the same average rate that we saw in October. For the fourth week-in-a-row 5 year CD rates held at 3.35% APY.

Looking at the yield ratio we have developed for deposit accounts, we see that the spread between savings rates and 36-month CDs is still close to its 12 month high. While it came down slightly, the trend is still up. This reflects the rate stability in longer term CD rates even as savings rates continue their glacial descent. The story is really the weakness in savings rates and the continued 0% Fed rate policy. That's driving the ratio. Banks are still awash in cash and cheap money from the Fed and the Fed's policy of keeping rates low for an extended period of time is going to drive this ratio higher.

It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with soaring equity markets and signs that the economy may be coming back to life. 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.

Mortgage Rates

Mortgage rates have declined over the past three weeks, touching lows not seen since last April when the Fed began buying up mortgage backed debt. According to the BestCashCow rate tables, the average 30-year fixed rate mortgage is now below 5% at 4.901%. The fifteen-year fixed rate mortgage average is 4.373%, close to the all-time low.

What one hand giveth, the other taketh. And so it is that savers are subsidizing borrowers. I could provide a scathing commentary on this but will simply say that if you can't beat them, join them. If you are looking to buy or refinance, now is another great opportunity to do so. You can compare the best mortgage rates in our new Mortgage section.