Savings Rates and CD Rates Little Changed - Weekly Rate Update

Last week the Fed gave its first indication that it might start raising rates sometime in the future. Bernanke stated that the Fed may raise the Discount Rate before long. The discount rate is the rate at which banks can take emergency loans from the Fed. It is not the same as the Federal Funds rate, which is more influential in impacting interest rates. Still, it's a start.

Over the past week, the issue of sovereign government default became more prominent as Greece jockeyes for a bailout from the EU. Many believe that Greece's debt problems are just a prelude to more problems from other highly indebted nations - Spain, Ireland, Italy, Japan. And some, like Marc Faber believe that mounting debt levels could even impact the United States.

A Federal Funds Rate predictions chart would show that markets do not anticipate a rate increase through the June Fed meeting. I suspect the rate will stay pegged at 0-25% a good deal longer, and potentially through the rest of 2010.

A low Fed Funds Future rate means low rates on savings accounts, money markets, and certificates of deposit for a good deal longer.

Savings Rates

Average saving rates hit a record low again last week moving from an average rate of 1.46% APY to 1.45% APY. While the averages have come down, the highest rates on the BestCashCow rate tables have remained steady. The highest rate is the Everbank Money Market Account, which is offering a 3-month guaranteed promo rate of 2.25% APY. The 1-year APY for the account is 1.51%. Following that is Franklin Synergy with a 1.75% APY and EBSB with a 1.67% APY. Other attractive CD rates are CNB Bank Direct at 1.50% APY and American Express Bank, FSB also at 1.50% APY.

CD Rates

Both the average 1-year CD rate and the average 5-year CD rate rose slightly over the past week while the average 3-year CD rate fell slightly.

The average 1-year CD rate rose by 1 basis point from 1.82% APY to 1.83% APY. The top rate continues to be 2% APY offered by Southern Commerce Bank.

The average 3-year CD rate fell by 1 basis point from 2.61% APY to 2.60% APY. The good news is that most of the rate leaders on the table remained stable. The top 3-year CD rate continues to be 2.8% APY offered by Hudson City Bank.

The average 5-year CD rate rose from 3.29% APY to 3.31% APY. The top rate continues to be iGOBanking's 3.55% APY CD. Acacia Federal Savings Bank also has a competitive IRA only CD paying 3.50% APY. The next best 5-year rate is Everbank at 3.37% APY. This marks the third week-in-a-row that 5-year CD rates have moved up.

Both the cd spread and the savings/cd spread remain near record highs. What does that mean? It means as a depositor, you are being compensated more highly for putting your money into a longer-term deposit account then you were even a year ago. This isn't a suprise as savings rates have collapsed while longer-term CD rates have come down much more gradually.

As we discussed last week, the elevated ratio means it may be worth taking a look at a longer-term CD, especially one that doesn't have an onerous early-withdrawal penalty. You can now earn 1.5 percentage points more by opening a 5 year CD versus a 1-year CD. If interest rates stay low for the next couple of years, as is possible, then perhaps this elevated spread makes opening the account worth it.

Regardless of this analysis, 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, that allow users to withdraw money penalty free, and still other banks are lowering the withdrawal penalty for removing money before maturity.