Britain sold £4.25bn of 30-year bonds at a yield of 5.82%, higher than any sale since records began in 1998. For savers, the interesting part is the gap that opens up behind that number.
Anna Macdonald, investment strategy director at Hargreaves Lansdown, told Sky Money that £20,000 in an average high street instant access account was earning around £190. It could earn as much as £764. Higher market rates, she said, mean more room to earn on cash.
She was careful not to turn that into a stampede. Investors should “avoid making knee-jerk decisions” in response to market moves, Macdonald said. “While rising yields can create short-term volatility, they have also improved the income available from cash, bonds and other lower-risk assets.”
The catch with gilts
Retail investors who buy gilts directly and hold them to maturity can lock in the higher yield, and the gains are exempt from capital gains tax. Macdonald added that buying low-coupon bonds and holding them to maturity pushes more of the return into capital gain, which makes the most of that exemption.
The catch is price risk. Low-coupon bonds are more vulnerable to price swings, so anyone who has to sell before maturity is exposed to whatever the market does. “Diversification remains important,” she said, “and investors should make sure their portfolio matches their long-term goals and attitude to risk.”
How long yields stay this high is the open question. It depends on inflation, growth and the global backdrop, Macdonald said, though markets appear to expect borrowing costs to stay higher than many people had anticipated.
Cash that is losing ground
Inflation gives the warning its edge. The Office for National Statistics confirmed that CPI inflation rose to 2.9% in July, up from a 15-month low of 2.6% in June. Ofgem’s energy price cap went up 13% last month, adding £221 to the average annual gas and electricity bill, which now stands at £1,862.
Analysis of CACI data by the savings app Spring found £502 billion sitting in adult savings accounts paying 2.5% or less, below the rate of inflation. The typical account in that group holds £8,099. Another £155.8 billion is held in 735,000 accounts with balances above £100,000 that also earn 2.5% or less.
Harriet Guevara, chief savings officer at Nottingham Building Society, said: “This is a reminder that inflation still matters. Even small increases can erode the spending power of cash over time, so it is worth checking that savings are held in an account paying a competitive rate.”
She suggested splitting savings by goal. Easy-access accounts may suit an emergency fund or short-term plans, while fixed-rate accounts offer more certainty for money that will not be needed straight away, and are particularly competitive at the moment.
