Fixed-rate bonds just got a whole lot more attractive
Daniel Smith, director at asset-backed bond provider Basset & Gold, explains why there is a light at the end of the tunnel for the nation’s savers
In February, Bank of England Governor Mark Carney put the nation on notice that the long base-rate freeze is about to start thawing rapidly.
The chances of a rate rise in May from the current 0.5 per cent are now higher than ever, according to many commentators and some are even pencilling in a further rate increase in August.
The general feeling is that rising interest rates will have a real financial cost impact on borrowers.
However rising interest rates should be better news for savers who have endured long years of low returns on their cash. The last Bank of England increase in November was the first for more than a decade and savers have suffered years of interest rates at historically low levels.
The Bank of England’s policymakers will have kept rates at a record low due to a fear about the risk of deflation, rather than being cautious about inflation.
But is there light at the end of the tunnel for Britain’s ever-patient savers? Well there should be, but many savings accounts are already loss-leaders for banks and building societies and so they are less likely than mortgage lenders to pass on any rise in interest rates.
Savers can’t be blamed for sitting on their hands, and their cash, as they’ve waited patiently to see if rates were genuinely heading northwards. Fixed-rate bond investors had to wrestle with the dilemma of how long to lock their cash away for when there might be higher rates on offer in the near future as rates rise.
It is a tough challenge for savers but one that also got us thinking about how we could help by combining competitive rates and minimise the risk of missing out on rate rises.
Our solution is to introduce the Basset & Gold Interest Rate Shield across our three-year and five-year fixed-rate bond range. It is unique to the market and we believe it will be very welcome to savers. As with all investments, your capital is at risk.
From 22 March, the interest rates of our Fixed Monthly Income Bonds, High-Yield Compounding Bond, and our Innovative Finance ISA have tracked any Bank of England interest rate increases, taking effect from the date of the bond issue. Whatever the Bank of England decides to do with the base rate, savers will benefit. And, of course, because they are fixed-rate bonds the rate will not fall if the Bank cuts rates.
Therefore, if the Bank of England rate increases by one per cent and then falls, savers will continue to get the benefit of the one per cent increase, as that was the highest increase since the bonds were issued.
Investors can also celebrate by putting their money into three and five-year fixed rate bonds that will immediately benefit from any rate rises that Mark and his team are keeping up their collective sleeves.
For more information visit the Basset & Gold website.
Risk Warning: This article sets out personal opinions. Capital invested in bonds is placed at risk and interest payments are not guaranteed. Investors should note that it could take the time it takes to liquidate an asset held as security in order to get money back at an acceptable price. There is no right to compensation in respect of poor investment performance.