Savings and CD Rate Update - May 13, 2013

Savings rates continued their relentless march. Average one-year CD Rates dipped from 0.366% to 0.364% APY. Three year average CD rates dropped from 0.726% to 0.722% APY. Five year average CDs dropped to from 1.066% to 1.060% APY. Online savings rates continued to hold the line at 0.705% APY. We remain on pace to see a sub 1% average APY on a 5 year CD rate by August or September.

While the averages have continues to drop, the top rates stayed the same over the past week.

• Online Savings: AmTrust Direct retained the top spot at 1.05% APY.
• 1 Year CD: Three banks retain the top spot at 1.05% APY.
• 3 Year CD: Navy Federal Credit Union, CIT Bank , Nationwide Bank and Navy all offer a 1.35% APY with minimum balances of $100,000. Barclays Bank Delaware offers the same rate with a $0 minimum.
• 5 Year CD: Barclays Bank Delaware, CIT Bank and Nationwide Bank all 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).

Check local CD rates in your area.

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 0.341 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.

General rate environment

Retail sales numbers out today beat expectations. Sales at U.S. retailers unexpectedly increased by 0.1 percent in April, after a 0.5 percent decrease in March. Most economists expected the payroll tax to take a bigger chunk out of consumer spending but rising housing prices, a rising stock market, and a stronger employment picture seem to be bouying consumer spending. This adds to hopes that the economy is starting to gather some steam, although I'll need to see job growth of around 300,000 per month to really feel like the economy is cooking (payrolls rose by 165,000 last month).

In related news, 10 year Treasury yields reached the highest in seven weeks on signs of a strengthening economy and lower budget deficits. Lower deficits due to economic growth and spending cuts reduces the government's issuance of Treasuries, which drives down supply and increases the rate.

At the same time, the stock market continues to hit new highs. I spoke to a family member last week who said the market was "getting her nervous." I also get nervous when something hits a new high. I asked her if she planned to exit the stock market and she told me no, she had nowhere to put her money where she could generate income. So lies the dilmena of investors throughout the world. I did stare her to some of the high yielding Dow stocks. Microsoft has a better debt rating than the U.S. government and its stock yields over 3%. Still, a good bond rating does not insure a stable stock price and the debacle that is Windows 8 shows that even a company like Microsoft, with billions in cash, can lay a stinker that might impact its share price. The stock has remained incredibly stable though, and even with such intense (and warranted in my opinion) criticism of its flagship product, the stock remains near a 5-year high.

I'm not advocating that savers shift all of their money to dividend stocks, far from it. Just for those that need income, there are some reasonably stable companies that offer yields a bit higher than savings and CDs. If you have to make the jump, consider these stocks first.

My outlook: Savings rates will continue to drift lower for the next 8-14 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 .696 percentage points. That's the first time the spread has dropped below the 0.700 mark and shows the flattening of the CD yield curve.

Is it worth it to go long and open a 5 year? If you don't need the money, it's probably okay. Rates may begin to rise in the next year but they probably won't shoot up. Inflation looks to remain tame. There is also the chance that we go Japanese and rates continue to decline, bottom out, and stay low for the next 5-10 years. In that case, a 5-year CD today would look good. I don't expect that to happen, but it could.

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 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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