Savings and CD Rate Update - December 3, 2012

The average one year CD average fell from .414% to .412% APY. Five year average CDs fell from 1.185% APY to 1.180% APY. Online savings rates were a bright spot with the average rising for the second straight week from .733% to .735% APY. It's important to remember that these are just averages and that the top rates are siginificantly higher. For example, Putnam County State Bank is offering a 2.27% APY, 5-year CD for residents of Putnam County and surrounding communities.

Factors Impacting Savings and CD Rates

Economic growth is steady but not fast enough to reduce unemployment. Several bits of data last week confirmed that economic growth is steady but subdued. Housing continues to show some bounce up from the deep bottom with the S&P/Case-Shiller index tracking a 3% increase in home prices from Sept 2011 to Sept 2012. Even a modest rebound in housing will help the economy as the sector will go from a large drag to a small benefit. That swing will add to growth. In addition, the Commerce Department released the 3rd quarter 2012 GDP numbers. Growth was revised upward to 2.7% but household purchases grew only at 1.4%, a relatively low number. After tax income adjusted for inflation grew at a .5 percent annual rate, down from a previously estimated .8 percent. Growth came in stronger than expected but incomes and purchases came in lower.

Holiday shopping may help jumpstart growth but the verdict is still out. No new figures on shopping trends for the holiday season after a strong start. But some analysts are predicting that shopping may be impacted by the aftermath of Hurricane Sandy as many on the East Coast focus on rebuilding instead of holiday shopping.

The Government remains stalemated on the fiscal cliff. It still seems most probable that some short-term resolution will delay spending cuts and tax increases, effectively kicking the can down the road.

Europe continues to choke on debt. The dance between Germany and Greece to figure out how to handle Greek debt continues, although Germany's stance is softening. Angela Merkel indicated yesterday she may be willing to consider writing down some Greek debt. Italian bonds continue to rally as yields drop and investor confidence seems to be returning. For now, Europe is quiet, although the core problems have not been resolved and Europe could be front center news at any time.

My outlook: Savings rates will continue to drift lower for the next 12-18 months before beginning to move higher. How high and how fast they move will depend on the government's ability to put a long-term budget deal in place, the continuation of a recent economic uptick, and the ability of Europe to put its woes behind it and resolve its fiscal problems.

So, what's a saver to do in this environment?

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 .768%. 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.

Make the best of a tough savings situation

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.

Hope you find some good deals in your Holiday shopping! Until next week...