CD Rates

Initial jobless claims dropped more than expected, another hopeful sign that the labor market is indeed getting better and we might see higher CD rates sooner than expected. Higher CD rates depend on the Federal Open Market Committee increasing their key interest rate, the federal funds rate.

The federal funds rate was driven to record lows by the FOMC when the financial crisis hit and the deepest recession since the Great Depression followed. Average CD rates, savings rates, and money market rates all fell to record lows and remain at record lows. Right now the best CD rates on 1 year certificates of deposit are just above 1.00 percent, average 1 year rates are even less at 0.63 percent.

The FOMC has stated that they plan to keep the fed funds rate near zero percent until the unemployment rate falls below 6.5 percent. The Fed believes this will happen sometime in the late 2015 but I see signs that rates may increase sooner. Initial jobless claims for the week ending May 4th, were 323,000, down 4,000 from the prior week’s number.

The better than expected number of 323,000 sent long term bond yields higher as analysts were expecting a number around 340,000. The jobless claims number is the latest in a string of better than expected reports on employment released in 2013. The employment rate which was expected to increased 0.1 percent to 7.7 percent actually fell 0.1 percent to 7.5 percent in April.

The number of jobs created in April, 165,000, was higher than the 135,000 jobs analysts expected. The number of jobs created in the prior two months was also increased. The number of jobs created in February 2013 was increased from +268,000 to +332,000, and March’s number was increased to +88,000 to +138,000.

In addition to jobs numbers, there has also been better than expected reports in many other areas of the economy. Consumers are also feeling better about the future as the Conference Board Consumer Confidence number came in at 68.1 percent, higher than the expected number of 63 percent. Pending home sales which were expected to be flat actually increased 1.5 percent as the housing market continues to improve thanks to low mortgage rates and low home prices.

Over the past month there has been a few negative reports released that show an economy that isn’t running at full steam. ADP Employment Change for the month of April was expected to show a gain of 150,000 jobs but the number actually came in at 119,000. Factory orders for the month of March declined 4.0 percent, lower than minus 2.5 percent analysts had expected.

The biggest impediment to a robust economy, a lower unemployment rate, and higher interest rates are politics in Washington. Government spending cuts and higher tax rates are taking a bite out of economic growth. The latest battle coming is the debt ceiling we will hit sometime in 2013.

If Democrats and Republicans wait until the very last minute to increase the debt ceiling, investors will become very nervous about holding stocks and commodities. Another round of panic selling in these markets will send stocks, commodity prices, and bond yields lower (when bond prices rise, bond yields move lower). Although the troubles actually will start in the United States, investors will still by U.S. Bonds since that is the only place they feel 100 percent safe in during uncertain times – the classic flight to quality.

The Federal Reserve has been keeping the federal funds rate at near zero percent for over 5 years now. This policy has forced CD rates down to record low levels. The Federal Reserve has stated they plan to keep the fed funds rate at the current level until the unemployment rate falls below 6.5 percent, which the fed believes will happen sometime in the fourth quarter of 2015.

The Federal Open Market Committee had their two day meeting last week and released a statement on economic policy right after the end of the meeting on Friday. There were no surprises in the Fed’s meeting minutes on economic policy that would force CD rates higher before Q4 2015, but another report was released that might send rates higher sooner.

April’s Employment Situation Summary was released by the Department of Labor which showed the unemployment rate falling 0.1 percent from 7.6 percent to 7.5 percent. The unemployment rate at 7.5 percent puts the rate only 1 percent higher than the point at which the Fed will increase the fed funds rate. A higher fed funds rate will force bank CD rates higher.

In the first four months of 2013, the unemployment rate has fallen 0.4 percent, on average 0.1 percent a month. If the rate continues to fall 0.1 percent a month, the unemployment rate will reach the 6.5 percent in the second quarter of 2014, six quarters before the Fed believes the rate will reach that point.

Another big question is even if the rate hits 6.5 percent sometime in 2014, how much will the Fed increase the fed funds rate? To get back to a “neutral” level in that the fed funds rate neither stimulates nor dampen demand, the Fed will have to increase it to the 1.5 percent to 2 percent range, taking the current inflation rate into consideration.

Beside the unemployment rate, another factor that will determine how fast interest rates move is the rate of inflation. Many economists believe the Fed’s purchasing of $85 billion a month in mortgage-backed (MBS) securities and U.S. Treasuries coupled with a zero percent fed funds rate is already fueling inflation.

Much remains to be seen, but I believe rates on interest-bearing assets will move higher sometime in the first six months of 2014  instead of the predicted late 2015. For now, the best CD rates on 12 month certificates of deposit remain at 1.04 percent and 12 month Treasury yields this week remain at 0.11 percent.

There were no changes for the best CD rates available on our 1 year CD rate table this week though average CD rates did increase. The best CD rates available on our rate table remain at 1.04 percent with an APY of 1.05 percent and average 12 month CD rates increased from 0.60 percent to 0.68 percent.

The bank offering at 12 month rate of 1.04 percent with an APY of 1.05 percent is GE Capital Retail Bank. A rate just above 1.00 percent might not seem that great when compared to rates a few years ago but you’ll be hard pressed to find a better rate. With current 12 month U.S. Treasury yields much lower at 0.12 percent you really don’t have much of an option to earn a better rate without risking your principal.

Going out longer term on your fixed asset investments won’t earn you a much higher rate. The highest CD rates on 2 year certificates of deposit this week are at 1.19 percent with an APY of 1.20 percent. The bank offering that 2 year CD rate and CD yield on our table this week is CIT Bank. Average 2 year CD rates are also higher this week at 0.87 percent, up from last week’s average rate of 0.82 percent.

Think you’ll do better investing in 2 year U.S. Treasuries? Don’t count on it, 2 year Treasury yields are much lower at 0.24 percent, about one fifth the highest 2 year CD rates. If you want to get a higher yield on U.S. bonds you have invest in a 10 year bond to earn a higher rate. Current 10 year bond yields are at 1.72 percent.

Below are list of the highest CD rates on our rate tables this week along with U.S Treasury yields:

Highest CD Rates

• 1 Month CD Rate at 0.15% from Virtual Bank
• 2 Month CD Rate at .020% from E-Loan
• 3 Month CD Rate at  0.45% from Ever Bank
• 6 Month CD Rate at 0.88% from Doral Bank Direct
• 9 Month CD Rate at 0.92% from Doral Bank Direct
• 12 Month CD Rate at 1.04%/1.05% APY from GE Capital Retail Bank
• 18 Month CD Rate at 1.03%/1.03% APY from Doral Direct
• 24 Month CD Rate at 1.19%/1.20% APY from CIT Bank
• 30 Month CD Rate at 1.09%/1.10% APY from Discover Bank
• 36 Month CD Rate at 1.30%/1.31% APY from Virtual Bank
• 48 Month CD Rate at 1.55%/1.56% APY from Nationwide Bank
• 60 Month CD Rate at 1.69%/1.70% APY from Nationwide Bank

U.S. Treasury Rates

• 1 Month Rate 0.04%
• 3 Month Rate 0.05%
• 6 Month Rate 0.09%
• 1 Year Rate 0.12%
• 2 Year Rate 0.24%
• 3 Year Rate 0.35%
• 5 Year Rate 0.70%
• 7 Year Rate 1.13%
• 10 Year Rate 1.72%
• 20 Year Rate 2.50%
• 30 Year Rate 2.88%

CD rates are stable this week as equity markets and commodity markets move lower on concerns of slower growth. Average 1 year bank CD rates are at 0.60%, down from last week’s average 1 year CD rate of 0.63 percent. The best CD rates on in our 1 year certificates of deposit remain unchanged this week. The best rates in database are from GE Capital Retail Bank at 1.04 percent with an APY of 1.05 percent.

3 month CD interest rates are averaging 0.30 percent, unchanged from last week’s average 3 month rate. The highest 3 month CD rates in our database this week are from Ever Bank at 0.56 percent. Ever Bank also topped our 3 month list last week with the same rate. The second highest CD rates in our 3 month database of rates this week are from E-Loan at 0.50 percent.

6 month CD rates are averaging 0.34 percent, down from last week’s average rate of 0.35 percent. The best CD rates in our 6 month certificate of deposit database are more than double the average rate. The bank offering the best rate is Doral Bank Direct at 0.88 percent. The second best rate in our database is from Discover Bank at 0.75 percent.

The current national average 24 month CD rate is at 0.82 percent, down from last week’s average of 0.84 percent. The highest 24 month CD rates at banks in our database are from CIT Bank at 1.19 percent with an APY of 1.20 percent. The second best rate in our database is from Virtual Bank at 1.15 percent with an APY of 1.20 percent.

Average 5 year CD rates this week are at 1.18 percent, down considerably from last week’s average 5 year CD rate of 1.27 percent. The best 5 year CD rates in our database are from Nationwide Bank at 1.69 percent with an APY of 1.70 percent. The second highest 60 month rate in our database is from The National Republic Bank of Chicago at 1.65 percent with an APY of 1.66 percent.

Average CD rates held steady this week as long term bond yields declined on a negative unemployment report for March. Average 12 month CD rates are at 0.63 percent this week, unchanged from last week’s average CD rate. The best CD rates on our rate list also remained unchanged this week at 1.04 percent with an APY of 1.05 percent. 10 year bond yields fell from last week’s high of 1.86 percent down to 1.68 percent Friday afternoon.

The Unemployment Report released last Friday showed non-farm payrolls only increasing by 88,000 jobs in March, which is much lower than the prior two months’ job numbers which were revised higher. The change in total non-farm payroll employment for January was revised from +119,000 to +148,000, and the change for February was revised from +236,000 to +268,000. The March number of 88,000 jobs will probably be revised higher as well in next month’s report.

Short term CD rates also remained unchanged this week. Average 3 month bank CD rates this week are at 0.21 percent, unchanged from last week’s average 3 month rate. The highest CD rates on 3 month certificates of deposit are at 0.46 percent, unchanged from last week’s highest rate. Average 6 month CD rates are at 0.34 percent, no change from last week. The best 6 month CD rates available also are unchanged at 0.88 percent.

Average 2 year bank CD rates fell to 0.64 percent this week, down from last week’s average 2 year rate of 0.65 percent. While average 2 year rates fell one basis point, the highest CD rates available on 2 year CDs remain unchanged. The highest 2 year rates on our rate list this week are at 1.15 percent with an APY of 1.16 percent, unchanged from last week’s rate.

5 year CD interest rates were actually higher this week over last.  The average 5 year CD rate is at 1.25 percent, up from last week’s average 5 year rate of 1.21 percent. The best 5 year rates on our rate table this week are from Nationwide Bank at 1.69 percent with an APY of 1.70 percent. Just a few years ago, the highest 6 month rates were just below 2.00 percent. Now you have to invest in a 10 year certificate of deposit from Discover Bank to earn a rate of 1.98 percent with an APY of 2.00 percent.

Below are lists of the highest certificate of deposit rates this week:

• 1 Month Rate/APY Lone Star Bank 0.15%/0.15%
• 3 Month Rate/APY Ever Bank 0.45%/ 0.45%
• 6 Month Rate/APY Doral Direct 0.88%/0.88%
• 12 Month Rate/APY GE Capital Retail Bank 1.04%/1.05%
• 18 Month Rate/APY Salem Five 1.14%/1.15%
• 24 Month Rate/APY Virtual Bank 1.15%/1.16%
• 30 Month Rate/APY Discover Bank 1.09%/1.10%
• 36 Month Rate/APY The National Republic Bank of Chicago 1.35%/1.36%
• 48 Month Rate/APY Nationwide Bank 1.55%/1.56%
• 60 Month Rate/APY The National Republic Bank of Chicago 1.85%/1.87%

The bailout of the Cyprus Bank system continues as the very unpopular solution to tax deposit accounts unraveled last week. The new plan will still take a bite out of bank accounts with balances of 100,000 or more euros but accounts with less than 100,000 euros will be spared any “tax” or forfeiture to help pay for the bailout.

The new plan still isn’t good news for holders of deposit accounts that have 100,000 or more euros in their accounts. Instead of just taxing all deposit accounts, the Cyprus government is restructuring the banking system to take money from deposits to help pay for the bailout. The country’s second largest bank, The Popular Bank of Cyprus (aka Laiki), will be shut down and deposit accounts below the 100,00 euro threshold will be transferred to the country’s largest bank, Bank of Cyprus.

Uninsured deposit accounts of more than €100,000 will be frozen and will be used to resolve the Popular Bank of Cyprus’ debts. At this point, it isn’t clear how much will be taken out or taxed but this plan is sure to make many people angry. It just goes to show that no matter where you bank in the United States, the European Union, or anywhere else, if there is deposit insurance limit you need to keep your account deposit amount below that limit.

You never know what will happen and in this case the European Union isn’t going to completely bail out the Cyprus banking system. During the financial crisis in the United States in 2008, the government had to step in and guarantee money market funds because the oldest fund, The Reserve Primary Fund, “broke the buck,” when the net asset value of the fund fell to 97 cents. This happened after the fund had to write off debt due to the Lehman Brothers bankruptcy. This caused investors anxiety about all money market funds and investors started pulling money out, almost causing a run on money market funds. A few days after the Lehman Brothers bankruptcy, the U.S. Department of the Treasury stepped in and guaranteed the holdings of “any publicly offered eligible money market mutual fund.” Both retail and institutional funds were eligible but they had to pay a fee to participate in the program.

The Treasury guaranteed that if a covered fund breaks the buck, it will be restored to $1 NAV. You can read about the Treasury guarantee in this New York Times Article back on September 19, 2008: Treasury to Guarantee Money Market Funds. The Treasury guaranteed money market funds against losses up to $50 billion.

The Federal Deposit Insurance Corporation (FDIC) insures certificates of deposit and other deposit accounts up to $250,000. Therefore, you need to make sure your deposit accounts are under the cap. The $250,000 includes interest earned. If you have more than $250,000 to invest in certificates of deposit you could open accounts at different banks but there is another way that makes it easier.

The Certificate of Deposit Account Registry Service (CDARS) is a service that allows you to have FDIC insurance protection up to $50 million. When you use this service, they spread your money throughout participating CDARS banks to make sure all your CD accounts remain under the FDIC insured amount.

The positive thing about this service is that you deal with one bank and open one account. Dealing with one bank and only having to open one account makes this concept great but there is a drawback. You won’t get the best CD rates available when opening a CDARS account, regardless of which certificate of deposit term you choose. Then again, at least your money will be 100 percent insured by the FDIC.

You can see how CDARS CD rates compare with other bank CD rates by using our rate tables below which only lists CD bank rates from FDIC insured bank.

The European Union came up with a very risky way to help pay for bailing out Cyprus banks. They are going to place a tax on money in deposit accounts.   The tax on deposits in Cyprus banks is 6.75% on deposits up to €100,000, and 9.9% above that level.  This is a very dangerous move that will certainly erode confidence in banks, not only in Cyprus but across the European Union. Depositors in the next country that needs a bailout would certainly have to pay the tax as well. To be fair to the euro zone finance ministers, they did have their backs against the wall when they came up with this decision. Germany, which has the largest economy in the zone, and the International Monetary Fund insisted that financial aid to Cyprus should be limited to €10 billion.

This decision will cause depositors to remove cash from all banks in the euro zone and at the worst time possible time. When confidence in the financial system in many euro zone countries is already low, with the economies growing slowly or contracting, taking money away from depositors will cause more harm than good.

Perhaps I would feel differently if I lived in a euro zone country that doesn’t need a bailout due to government borrowing and spending run amok. It will be interesting to see how this plays out since there is going to be a big backlash in Cyprus. I wouldn’t be surprised if the EU reversed their decision.

Can you imagine something like that happening to depositors in the United States? I can’t and I honestly believe that would never happen here.  It’s like thinking your certificate of deposit or savings account is FDIC insured up to $250,000 and then finding out when the bank fails,  you’re not insured for $250k.

Speaking of certificate of deposit accounts, CD rates are stable this week. The best CD rates this week on 1 year CDs are still at 1.04 percent with an APY of 1.05 percent.

This decision is so risky it might be designed to have Germany and the IMF change their minds about limiting the dollar amount of the bailout. The temporary loss in equity prices across the euro zone probably will be higher than the €5.8 billion ($7.6 billion) the tax is supposed to raise