Like the number of teams being whittled down in the NCAA March Madness basketball tournament, bank rates continue to fall, a few basis points today, a few basis points tomorrow. We can track at least 76 consecutive weeks in which CD rate averages have declined. While I still don't think we will see a 0% APY 12-month CD average, plenty of banks are already close to 0%. Check out rates from The Marblehead Bank in Marblehead, Ohio. As I said last week, shop around. There are better rates out there.
In the last week, average one-year CD Rates dipped from 0.381% to 0.379% APY. Three year average CD rates dropped from 0.753% to .751% APY. Five year average CDs dropped to from 1.100% to 1.097% APY. Online savings rate stayed stable at 0.707% APY after dropping last week. If the pace of decline continues, we could see 5 year CD rate averages dip below 1% APY sometime in August or September.
Even if the averages are all below 1%, the top rates are still significantly higher. BestCashCow data shows the top rates for some key terms are:
- Online Savings: AmTrust Direct retained the top spot at 1.05% APY.
- 1 Year CD: Five banks retain the top spot at 1.05% APY.
- 3 Year CD: Pentagon Federal Credit Union at 1.60% APY
- 5 Year CD: Barclays Bank Delaware now occupies the top spot alone at 1.85% 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) than online banks so be sure to check them out.
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. The spread still remains very elevated although it has come down in recent weeks as several online banks have cut rates. On average, online savings account rates pay .328 percentage points more than 1 year CDs, up from .23 percentage points more at the beginning of last year but down from the spread's high of .344 percentage points in late January.
General rate environment
There wasn't a lot of new economic data last week but I did run across a couple of interesting articles on Bloomberg. "Payroll Growth Vaults to Higher Pace at U.S. Companies" by Rich Miller & Shobhana Chandra provides some good evidence that hiring is on the uptick. Economists expect job creation to come in at about 200,000 jobs per month. While lower than the 300,000 needed to really drop the unemployment rate, it's an improvement from the 167,000 jobs per month average in the second half of 2012.
Bloomberg is also publishing a series from economist Gary Schilling titled "Why Global Economies Face an Age of Deflation." Schilling called both the Internet and housing bubbles so I value his opinion. In the article, he writes that the world is five years into a ten year deleveraging process. Until the process is over, growth will remain slow, at around 2-2.5% in the United States. Makes sense to me. Consumers and governments are still trying to chew through all the debt accumulated in the lead-up to the global financial crisis. Paying down that debt will divert money from buying new toys paying for pet projects.
So, are we looking at another five years of declining rates? As I stated in the opening paragraph, rates are almost at 0%. It's very possible though that average bank rates could drift down even closer to 0% over the next year and then stay there for another four years. Banks wouldn't mind this deposit scenario. Many of them have more deposits then they know what to do with. It's also the same situation that happened in Japan where rates have remained close to 0% for over twenty years.
For now, I'm sticking with my forecast. I think rates will rise in the next 9-15 months, but right now, I don't think they will rise by much.
My outlook: Savings rates will continue to drift lower for the next 9-15 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.
Cyrpus Protects Some of Its Depositors
If you think remaining under the $250,000 FDIC or NCUA insurance limits was a formality, just look at what is playing out in Cyprus. As I wrote last week, Cyprus has a banking system on the verge of collapse. Last week, before the EU would agree to give the country a $13 billion bailout needed to keep the banks afloat, it attached an unprecedented requirement. Deposits in Cypriot banks will face a one-time tax to help defray the bailout costs. Deposits of more than 100,000 Euros will face a levy of 9.9% while those under 100,000 Euros will face a levy of 6.75%. Depositors under 100,000 Euros were going to lose money depsite the fact that Cyprus has a deposit guarantee. Going through with this would have set a dangerous precedent that even "insured" money held in banks deposit accounts is not safe.
Thankfully, Cyrpus voters rejected the plan and the government and the EU have agreed on a new one that protects insured money up to 100,000 Euros. Uninsured depositors will lose between 30-70% of their funds. While no one wants to see any investor lose money, a plan that forces losses on savers who were told their money was insured is the worst of all worlds and would have undermined other insurance mechanisms in Europe and even in the United States.
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 .728 percentage points.
I will caveat this now. If rates continue to drop over the next year, bottom out, and then stay there for the next five years, then putting money into the highest paying 5 year CD may be a smart move. I will keep my advice on where to put money the same for now.
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 week, they have still offered decent rate stability over the past year.
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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