Learn Bond’s has noticed a sharp decline in the number of banks advertising their CD and savings account rates. We have also noticed a sharp decline in the number of people interested in purchasing CDs. Why? The FED has driven borrowing rates for banks so low, that it doesn’t make sense for most banks to offer CD rates above 1%. At below 1%, many investors don’t see the point in moving their money to a new bank to earn more interest.
There are still a few banks which are offering one and two year CD’s with rates above 1%. As pathetic as a “1.2%” yield might seem, you’re not very likely to see much better in next 3 years, and there is a risk that these offers might disappear entirely. The national average for a 1 year CD rate is only 0.13% (BankRate), down from 3.0% five years ago. Top CD rates could easily fall by ¼ or ½ percent over the next few months.
Why is the national average for CD Rates so low?
The FED sets a target range for the FED Funds rate, which is the rate at which banks loan money to each other overnight. Since December 2008, the FED Funds Rate target has been sitting at 0.0 – 0.25%. While banks can borrow money at the FED Funds rate, they typically like to borrow money for longer periods of time. A couple of the reasons that banks prefer to borrow for longer include a concern that rates may rise in the future and a fear that they may not be able to easily re-finance their debt. (Borrowing at the overnight rate requires that they find other banks willing to loan them money every day.)
However, both of these issues not longer apply. The Federal Reserve over the course of the last year has said that they don’t plan to change the FED Funds rate until the middle of 2015. In December, they took the further step of saying that they don’t plan to raise rates until US unemployment hits 6.5% (currently, 7.7%). Many economistd believe this means that the FED Funds Rate will not rise until even after 2015. In other words, The FED has essentially told banks that their short-term borrowing costs will not rise for the next 3 years and maybe longer. The FED has also announced that they will continue pump money into the market, making the chance that a bank will have trouble refinancing debt very minimal. The main reasons that banks like to borrow money for shorter versus longer periods of time have disappeared. As a result, the average yields on CDs are very low. (for more on what the FED’s recent moves mean for bond investors go here)
Why are there some CD deals left?
On LearnBonds’ Best CD Rate Table, there are currently three banks advertising their 1 year CD products (although we have the top rates listed for dozens of banks.) They are all online banks that have no branches to sell their services. In short, they promote themselves by having high CD rates. Only a year ago, I remember there were six or seven banks promoting their high rate CD products. While I don’t know for sure, my assumption is that all the banks currently advertising are losing lots of money on their CD offers. The assumption is that they are losing money in the short-term in an attempt to gain long-term profitable relationship. However, you can only lose so much money for so long before the costs becomes too painful to bear.
Could the remaining banks pull their special offers? Yes.
Is it worth the hassle to switch banks to get an extra 1%?
With high yield CDs only yielding 1%, many people don’t feel that its worth their effort to open an account with a new bank. However, many of the same people would gladly open a new account to earn 4% instead of 3% on a CD. In this example, the extra yield for bothering to open a new account is 1%. The same amount of amount of extra yield an investor can get from opening a high yield cd versus an average CD now! Don’t think its not worth shopping around just because overall rates are low.