Why fixed-rate bonds may have peaked at 6%
- Smaller challenger banks are paying around 6% for some fixed-rate deals
- But some bonds are on sale only for a matter of hours
Savers can now bag the highest fixed rates in nearly 15 years, but they should not be complacent — some of the best deals are vanishing within hours.
You need to move fast to secure offers of more than 6 per cent, experts say.
Fixed savings rates have soared to their highest level since 2008, with the best one-year bond now offering 6.1 per cent with FirstSave, followed by Atom Bank at 6.05 per cent.
The Bank of England has been forced to hike rates to combat inflation, which has remained higher than expected. Interest rates have been dramatically increased, from 0.1 per cent in December 2021 to 5 per cent today.
Fixed-rate bonds reflect what the wholesale money market traders think will happen to rates
Investors widely expect the base rate to climb even further to 6 per cent by the end of the year, as inflation remains high.
But that doesn’t mean bonds will automatically follow suit, experts say. Instead, rates could start to drop very soon.
That is because fixed-rate bonds and variable rate accounts are priced differently.
Variable rate accounts are priced on base rate — so should move largely in line with the Bank of England’s rate.
However, fixed-rate bonds reflect what the wholesale money market traders think will happen to rates. Competition also plays a big part in the price of fixed-rate bonds.
Smaller challenger banks are paying around 6 per cent for some fixed-rate deals, but some bonds are on sale only for a matter of hours. That is because they do not have a great appetite for large amounts of money.
They only want to attract enough savings to finance their lending, and do not want money lying around on their books if they can’t lend it out.
Or they come out with a top rate to keep their name in the spotlight, but don’t want to be overwhelmed by too many applications. This means the rates are not offered for long.
It’s a fact!
Five years ago, the average interest rate on a one-year bond was 0.87 per cent, says the Bank of England
Kevin Mountford, co-founder of savings platform Raisin UK, says: ‘Savers are moving their cash around, and these new banks want to attract money into fixed-rate accounts to ensure it stays with them. But these deals don’t last long, so it doesn’t pay to wait around.’
Earlier this month, Close Brothers merchant bank offered 6.05 per cent, but the bond was available for only a day before being withdrawn from sale.
Another bank planned to launch a one-year bond at 6 per cent or 6.03 per cent for 18 months, but changed its mind before the bond was released for fear of attracting too much money.
Sarah Coles, of stockbroker Hargreaves Lansdown, says: ‘We have seen some of the best deals gone in a flash.
‘It’s impossible to spot the top of the savings market until you’ve passed it and are on the way back down, so if you want to fix, and you’re hanging on for more rises, you’re playing a risky game.’
For example, if you plump for the top one-year bond now, you would earn £610 in interest on every £10,000 you set aside.
If you leave your money in the top easy-access account — 4.52 per cent with Shawbrook — for six months, then take out a six-month bond, assuming rates are the same as today, you will earn £498 in interest. That is £112 less than if you lock your money away for the full year.