Fixed term bonds rates rocket upwards – is now the time to fix?

The latest inflation figures announced by the Office for National Statistics were grim, showing that although the rising cost of living had slowed a little in the 12 months to March 2023, it was still higher than expected – again! Inflation is proving to be very stubborn. As a result, the financial markets are now expecting the Bank of England to increase the base rate by more than previously anticipated – up to 5% rather than the current level of 4.50% which it had been expected to peak at.

Whilst high inflation is causing us all some pain, especially as it is key items such as food that is really driving the price hikes, there is some good news for savers.

Not only can we expect to see yet more increases in our variable rate savings accounts, but fixed term bond rates have reacted to the markets revised expectation of the base rate and we’ve seen some pretty dramatic activity recently.

What has happened to fixed term bond rates over the last 18 months?

It has been almost 18 months since the base rate started to rise, from 16th December 2021. At that point inflation was thought to have been transitory and the Bank of England was expecting to have gained control by now. But even the policy makers have accepted that the rising cost of living is proving to be far sticker and more painful than expected.

And as a result, fixed term bond rates have reacted positively – providing some real value to those who are able to lock some cash away.

Those who took out a 1-year fixed term account a year ago could have earned a maximum of 2.26% AER - £226 for each £10,000 deposited, and at the time we thought that was generous as the top rates on offer had been significantly lower just a year or so earlier. With the base rate falling in March 2020, and the markets uncertain about when the Bank of England would be able to raise rates again, the top rates on offer fell to as low as 0.58% for the best 1-year bond in February 2021 and just 0.71% for the best 2-year in March 2021.

However, things are significantly improved and those savers with bonds maturing now are likely to be delighted to find that the rate they could earn on a 1-year bond today has more than doubled to 5% - that means earning £500 over the next year (at the time of writing), via the Allica Bank 12 Month Personal Savings Account (Issue 40).

Over two years, the news is equally as positive. Anyone with a 2-year bond maturing now is in for a nice surprise. If you had opened a 2-year bond in May 2021, the top rate you could have found was 0.90%. If you are looking to roll over that cash for another 2 years now, you can earn as much as 4.96% AER with OakNorth Bank. Or even 5.01% for 18 Months with Hampshire Trust Bank.

Is now the right time to fix?

I am asked this question repeatedly and of course it’s impossible for me to categorically say, as things in the wider economy are always changing which can have an impact on the action of the policy makers at the Bank of England.

But what I can say is the top fixed term bond rates that are currently available are even higher now than they were in the aftermath of the disastrous mini-budget last year, which saw expectations for the base rate to be increased to as much as 6%!

And last week, Isbank, the UK division of a large Turkish private bank, launched a stable of bonds paying 5% across a range of terms from 1-year to 7-years, via the Raisin UK cash platform.

These bonds have since been withdrawn but there has continued to be some competition between key providers that means rates are still high, as mentioned above. Take a look at our Fixed Rate Bond tables to see the latest rates.

And it’s not just the short-term bonds that have been increasing – over the longer term too things have improved. A year ago, the top paying 5-year bond available was around 2.83% - today it’s 4.95% (the latest offering from Isbank via Raisin UK).

How long should I lock my money away?

What is interesting to see, is that although we have become used to expecting longer term bonds to pay more than shorter term, as you are giving up access to your money for longer, this isn’t really the case at the moment. The rates on the longer-term best buys are actually lower than the short-term.

This is because it is expected that after a peak of 5%, the base rate will fall again somewhat, once inflation is under control. So, although the temptation will be to choose a short-term bond paying higher or the same rate as a longer term bond, you’ll only know with the benefit of hindsight if you should have fixed for longer.

If, as ex-chief economist of the Bank of England Andy Haldane predicts, inflation comes down sharply over the rest of this year, you could find yourself with a bond that is paying close to or even more than inflation for some or much of the term if you’re brave and fix for longer.

It has certainly been an extraordinary time for fixed term savings rates, so if you have some cash that you don’t need access to in a hurry, you could consider tying some of it up, to make the most of the higher rates while they are available.

And remember, that if you hang around waiting to see if something better comes along, which of course it could do, you are missing out on the higher interest in the meantime and if we are at the peak, you could just miss out on that too.

Perhaps a balanced approach is called for.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The accounts and rates mentioned in this article are accurate and correct as of 18/5/2023.

The Financial Conduct Authority (FCA) does not regulate cash advice.