There's been a small resurgence in the market for fixed-rate bonds, but is it enough to attract savers?
A tussle between Aldermore and Vanquis Bank has driven up the top rate on medium and long-term bonds.
Aldermore was the first to announce an increase to its fixed-rate bond range. On Friday, it boosted its 3 year bond by half a percentage point to 2.70% - the market leader for this term.
The latest review also sees the 4 year bond improve to 2.90%, while the 5 year bond now pays 3.10%.
But Vanquis Bank was quick to respond, boosting its 5 year bond to 3.11% to regain the market-leading position.
The resurgence has also attracted other competitors to raise their game. The Bank of Cyprus UK has increased its own 3 year bond by a quarter-point to 2.50%.
Shawbrook Bank also remains a strong option for 5 year bonds, at 3.10%.
Inflation and interest rates
An unexpected fall in inflation to 1.5% in May makes these rates seem more attractive right now than they might otherwise have done.
A £5,000 investment into Aldermore’s leading 3 year bond will return £331 after deductions. The leading 5 year bond from Vanquis will return around £654.
But is this enough to attract your funds?
When will the Bank raise rates, and will conditions improve for savers?
The market now expects the Bank of England interest rate to rise by a full percentage point by the middle of 2016.
But everyone knows that predicting events is tricky. This is evidenced by the unexpected fall in inflation, which has already set back the possibility of a rate rise before the end of the year.
Then there’s the question of how generous lenders decide to be.
Can we count on banks and building societies passing on interest rate rises in full through equivalent increases to savings account rates?
It may be that a mid-term bond proves to be a reasonably competitive option until rates begin to see a real shift upwards, which may take some time.
Where else can you invest?
But other options remain available. The 3 year ISA from Virgin Money at 2.25% outperforms the best bonds at this term because no tax is payable.
An investment of £5,000 here would return £345 – an increase of £14 on the Aldermore bond.
Current accounts also remain a strong option. You can earn 5% on balances up to £2,500 (Nationwide) or 3% up to £20,000 (Santander). And unlike bonds, you’ll retain full access to your cash.