BondsJun 13 2018

Interest rate on one year bonds hits multi-year high

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Interest rate on one year bonds hits multi-year high

Increased levels of competition in the savings bond market is pushing interest rates up, according to data from Moneyfacts.

Research by the company found one year bonds are now paying an average of 1.29 per cent interest.

This is the highest level since April 2016, before the market uncertainty brought on by the Brexit vote, when the same bonds paid 1.33 per cent.

Because these assets are lower risk, the yield would be expected to be falling as the level of risk rises in the market, and the yield will be higher when the level of risk is low.

This is because, when market conditions are bouyant, investors are happy to take more risk, so shun safer bonds of this kind. That forces issuers to offer a higher interest rate to attract investors.

Uncertainty continues to be a feature of markets, but Rachel Springall, of Moneyfacts said the products coming to market from several new entrants has been behind the recent rise in the interest rate.

She said rates should continue to rise as government initiatives such as the term funding scheme come to an end.

She said those schemes were such a cheap source of finance for banks they had little need to offer attractive bond rates to raise capital, but the end of those schemes will cause banks to return to the bond market with better offers.

Mel Kenny, chartered financial planner at Radcliffe and Newlands in London said: “For those with no risk appetite or have a short time horizon before the need to access, the rates on short term bonds are a necessary evil, so it’s good to see rates are improving.”