For the first time in over two years, the average rates on three and five year CDs rose in the past three weeks. This is both momentous in the savings world, and a yawn. First, the momentous part. Over the past month, bond and mortgage rates soared as the economy seemed to gain some speed and Fed Chairman Ben Bernanke hinted that the Fed, at some later date, might begin to scale back the Fed's purchase of treasuries and mortgage backed securities. Since May, the average rate on a 30 year fixed rate mortgage have risen from 3.770% to 4.547.%. During this period, the relentless rate of savings and CD rate declines began to slow. Then, on July 1, rates on the 60 year CD increased from 1.049% APY to 1.051% APY. They increased the following weak to 1.052% APY and then held steady this weak. Great, rates are finally increasing, right?

Yes, but hold the Champagne. First, the increases are pretty minimal - 3 basis points in total. That's almost insignificant. Secondly, Mr. Bernanke has done everything since the spike in rates to reverse direction and try to talk rates down again, even stating that the Fed may not lower rates even if unemployment hits its target rate of 6.5%. I don't expect to see any significant increase in savings or CD rates for the time being and long term CD terms may even continue the decline soon unless the economy shows more signs of life.

Top Rate Recap

During this period, top savings and CD rates stayed pretty much status quo.

• Online Savings: AmTrust Direct retains the top spot at 1.05% APY.
• 1 Year CD: GE Capital Retail Bank holds the top spot at 1.05% APY.
• 3 Year CD: Barclays Bank Delaware has the best rate with a 1.35% APY. CIT cut their rate from 1.35% APY to 1.30% 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). You can search for better local rates here.

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 0.342 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. Even as longer-term CD rates have stabilized and even increased, short term CDs (one year or less) have continued to fall. At the same time, online savings rates have remained relatively steady.

General rate environment

In my rate outlook, I didn't and still don't predict savings and CD rates to rise for 6-12 months. I was proven slightly wrong over the past six weeks as longer term CD rates inched up a bit, a very small bit. The Fed has pulled back and now continues to work to keep rates low. I can't help feeling that is like turning the spring tighter and tighter and that eventually, when the Fed does decide to unwind or let rates rise, they are going to climb remakably fast. We saw some of that with mortgage rates, and how they shot up on average by almost two percentage points in a six week period.

Although the economy has showed growth in fits and starts, the overall picture looks pretty much like slow, plodding growth. Economists estimate the U.S. grew at a slow 1% annual rate in the second quarter while China's economy is decelerating. And Europe remains mired in recession and high unemployment. So if we look at the scorecard:

• Taxes: Increasing - drag on growth
• U.S. economic growth: Slow
• Europe and the world: Slowing growth
• Technology: Other than fracking, no innovation that seems capable of spurring growth at the moment.

My outlook: Savings rates will continue to drift lower for the next 6-12 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? I don't think so any more. I think the 5 year CD rates are just too low and that you'd be better off putting your money "safe" money into an online savings account and waiting for rates to rise. I spoke to one banker last week who said that "no one was investing in long-term CDs."

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 do want the slightly extra yield offered 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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I occasionally like to analyze the BestCashCow database to see how rates vary by state, bank size, etc. It's been awhile since I ran a rate analysis by bank size and by bank type (online versus brick-and-mortar) so I decided to update it and see how various sized banks fare against each other and against online banks and credit unions. If you want a competitive rate should you start at the big bank down the street, the credit union, or the small local bank? Or should you open an online account? Here's what I found.

Smaller Banks Offer Higher Rates

For those who prefer brick-and-mortar banking an analysis of over 6,000 banks revealed that you can earn almost half a percentage point more on a CD just by depositing money at a small community banks versus a big mega-bank. Or, put another way, small community banks with less than $1 billion in assets on average pay 0.40 percentage points more on a 3 year CD and 0.44 percentage points more on a 5 year CD.

• View the best savings account rates.
• View the best CD rates.

These results are in-line with what we discovered last year, the findings being published in the Wall Street Journal. The bigger banks don’t want to compete on rate and prefer to compete on convenience and technology. If you are looking for a better rate it would be wise to investigate some of the smaller banks in your neighborhood.

Bigger is Better with Credit Unions

When analyzing credit unions, the finding is reversed: bigger is better, at least when it comes to CD rates. After analyzing 2,242 of the 6,753 NCUA insured credit unions, BestCashCow data shows that on average credit unions with greater than $10 billion in assets pay .30 percentage points more than those with under $1 billion in assets for 3 year CDs. The same finding holds true for 5 year CDs.

Larger credit unions operate fall smaller branch networks than a similar sized bank and in this way their cost structure is closer to online banks. They are able to take the savings from their scale and pay it out in higher rates.

Local Banks & Credit Unions Versus Online Banks

Last year, up to 8% of the banks in our database beat the best online rate in 3 year and 5 year CDs. This year, the number has shrunk to 4% as brick-and-mortar institutions have cut rates while online banks have held relatively firm. If you are looking to open a savings account, an online bank is the place to get the best rate. The same is true for 1-2 year CDs. For 3-5 year CD terms you can still find local banks that offer rates as good as if not better than that offered by an online bank. You can search for local online rates here.

Conclusion

• If you don't mind opening an online account, the online banks offer the best rates on savings and money market savings accounts as well as 1-2 year CDs.

• If you plan to open a 3-5 year CD, then you can choose from an online bank or a competitive local bank. The big banks are not competitive.

• If you quality for membership, a large credit union might offer the best rates, combining the rates of an online bank with the service of a community bank.

To help you begin your search for the best rates:

• View the best savings account rates.
• View the best CD rates.

Are CDs Going Extinct?

For the last fifty years, CDs have been a stable part of an investor’s portfolio. Risky money went into stocks, less risky into bonds, and the money a person didn’t want to lose went into CDs. For retirees, CDs often comprised a significant percent of a saver’s portfolio.

But with interest rates at record lows, and the average rate on a 12-month CD at 0.36% according to BestCashCow data, one has to wonder if CDs have lost their place. The answer seems to be, yes.

Data from the St. Louis Federal Reserve Bank shows that time deposits (time deposits are another name for CDs) have fallen sharply over the past four years since the financial crisis, and are now at the lowest level since before 1980. CD deposits have fallen by more than 50% since they peeked near $1.4 trillion in the middle of the last recession.

My hypothesis is that low rates have forced savers to do one of two things. Either they have decided that the low rates do not warrant locking money up in a CD, and have put it into a more liquid savings account, or they have taken the money and invested it in the stock market.

The chart below shows CD deposits versus total savings deposits. Notice how savings deposits have skyrocketed since the financial crisis and not come down. Some of this may be noise due to corporate cash but the big online banks that focus on savings accounts have seen their deposit bases increase significantly in the past five years.

Below, Discover Bank’s deposits have grown from $28 billion in 2008 to $42 billion as of March 2013. Online banks such as American Express and Ally Bank have experienced similar growth. It appears to be true that while CD deposits have shrunk, consumer savings deposits have grown significantly over the past five years.

Let’s look at the second part of the hypothesis: CD owners are putting their money into the stock market. In fact, inflows into the stock market from retail investors have been very low over the past five years. By and large, the average consumer is not jumping back into the stock market.

An article by 24/7 posted on Marketwatch stated:

Are investors returning to the stock market? Absolutely they are. The DJIA and S&P 500 back at five-year highs did not come magically. But it still left much of Joe Public and retail investors on the sidelines. Now it looks as though retail investors were net buyers of stocks recently for the first time since 2007.

Net buyers for the first time since 2007! No, that CD money did not go into the stock market. Only now are consumers beginning to tip their toes back into the stock market.

This leads me to my last chart. I post a chart like this every two weeks in my Bank Saver column examining the yield difference between savings rates and 1 year CDs.

The chart shows that over the past couple of months online savings accounts have paid on average .35 percentage points more than a 1 year CD, up from .23 percent more in 2011. Online savings accounts have gotten more attractive relative to CDs over time. In fact, the average savings account rate is about the same as a 3 year CD. In addition, online saving account yield have not dropped nearly as quickly as CDs, making online savings accounts a reasonable alternative to a CD.

Conclusion

Savers are eschewing CDs for savings accounts because they now pay an equivalent rate and are more liquid. Many consumers have decided that to lock money up for an extended period of time at an extremely low rate is not worth it.

This is not the end for CDs. As interest rates rise and long-term CDs start to pay a more reasonable rate, money will move back in. But for now, the extended low term cycle has put the once-popular investment option on the endangered species list.

Are you still putting money into CDs? Does this conclusion match your own thinking? Do you plan on putting more money into CDs over the next couple of months? We’d love to get your feedback.