Why are ONE-YEAR savings bonds paying more than FIVE-YEAR deals?
Savers have benefitted from rising interest rates off the back of 11 consecutive Bank of England base rate hikes after years of paltry earnings on their cash.
In fact, the rate on a one-year bond (as of yesterday) had reached a near 15-year high, according to data site Moneyfactscompare.
It gives the average one-year fixed bond rate at 3.9% on a £10,000 deposit, which is the highest monthly average since December 2008 when the average rate stood at 4.42%.
And today, savers looking to deposit their cash into a one-year fixed rate deal can gain 4.71% from SmartSave.
The last time the top one-year fixed rate paid or breached this figure was in January 2009 when savers could earn 5.1%.
However, for those looking to tie up their cash for longer, they may be surprised to see that the top rate in this category stands at 4.65% from Atom Bank – a lower rate than the one-year deal.
Why are one-year deals paying more?
Typically, the longer you fix your savings, the more attractive the rate is. However, this is not the first time that this standard relationship has flipped out of sync.
The last time was March 2009 when a one-year deal paid 3.9% while the five-year deal paid 3.7%, according to Moneyfactscompare.
Anna Bowes, co-founder of Savings Champion said the fact that longer-term rates are lower than short-term rates is because the market is expecting inflation and therefore interest rates to fall “after peaking at perhaps 5% this year”.
Bowes said: “If some of your cash was tied up in a bond paying 4.65% fixed for five-years (Atom Bank), or even 4.75% in a three-year bond, if inflation were to fall closer to its 2% target, savers who have been brave could earn more than inflation for some of the time their cash is in the bond.
“Of course, the danger is always that we don’t know what will happen next and once you have committed cash to a fixed term bond, you cannot access the money before maturity, so it’s probably a good idea to have a bit of a pick and mix approach to your savings. Keeping some in the current best long-term bonds in case rates do start to fall, while other cash is kept in shorter-term accounts earning a little more, and other cash still in the top paying easy access accounts, just in case something better comes along.”
Rachel Springall from Moneyfactscompare echoes this: “Shorter-term fixed savings accounts can be a preferred choice amongst savers right now, however, typically a longer-term fixed bond is more attractive if there is an expectation for interest rates to plummet.
“It widely depends on how much evidence is available to both savings providers and consumers, surrounding the volatility in interest rates and other economic factors. Savers may need to act quickly to grab a top rate, particularly if offered by a challenger bank that reaches its funding targets.”
Is recession on the cards?
For Hargreaves Lansdown, when short-dated bonds pay a greater rate of interest than long-dated bonds, this is called an “inverted yield curve” which is “traditionally a predictor of recession”.
Emma Wall, head of savings at Hargreaves Lansdown, explained: “The yield curve normally plots low for one-year fixed rates, ticking upwards from bottom left to top right. This shape usually indicates that we are in a period of economic expansion, optimism abounds. An inverted yield curve is a line that sweeps downwards – top left to bottom right, and indicates the opposite, a period of economic contraction – a recession. A flat line usually means change is afoot. Currently plotting the best savings rate for one, two, three and five year accounts the line sits somewhere between all three, trending slightly down towards the five year.
“This indicates economic uncertainty – the outlook for how the Bank of England will next act on rates is mixed. In the meantime, it is an opportunity to snap up attractive short-term rates.”
The next Bank of England base rate decision will be published on 11 May 2023, while at its latest meeting in March, it forecast bank rate to peak at a little above 4.5% in August 2023.