One-year bond rate falls for first time this year

Savers looking for the ideal compromise between rate and flexibility may be tempted by a short-term bond, allowing them to get a higher interest rate than with more flexible accounts for a relatively short commitment. However, they may be disappointed to learn that rates are edging down, with data from the latest Moneyfacts UK Savings Trends Treasury Report revealing that average returns on one-year fixed bonds have fallen for the first time this year.

The average one-year fixed bond rate now stands at 1.42%, a notable drop of 0.05% from March (1.47%) and the lowest seen since October last year, when it also stood at 1.42%. It's also the largest monthly decrease seen since September 2016, and is in sharp contrast to the more recent pattern, with rates having generally edged up over the last few months.

Not only are one-year fixed bond rates falling, but the data goes on to show that longer-term rates are falling, too, with the average long-term bond rate down by 0.02% month-on-month to 1.87% – which also marks the first time both averages have dropped in the same month since January 2017. Savers also have less time to take advantage of the deals that are available, with the average shelf life of a fixed product – the time between a bond being launched and it being repriced or removed from sale – falling to 48 days, down from 69 in March and the shortest period seen since January 2017.

The following table highlights the changes in more detail:

Savings market analysis

*Longer-term fixed bonds are those with terms over 550 days. Source: Moneyfacts Treasury Reports

"This latest shift in the market will come as disappointing news to savers hoping for the market to recover at a faster pace," said Rachel Springall, finance expert at Moneyfacts.co.uk. "The drop since last month is in stark contrast to the start of 2019, where the average one-year fixed bond rate had risen consecutively – from 1.43% in January to 1.47% in March – thanks in part to the determination of challenger banks to attract new money to fund their future lending.

"However, savings providers offering a fixed rate bond commit to the interest they pay for the duration of the term, so it's no surprise that they must adapt their market position should they attract too many deposits. Therefore, this fall may well be the start of providers' attempts to sustain their offerings or reduce the cash coming in by making reductions or withdrawals – but this could drive others to follow suit as they unexpectedly climb the rate tables."

Yet savers themselves could be starting to turn away from fixed rate bonds, with consumer demand for such accounts diminishing. Indeed, additional data suggests that economic uncertainties are beginning to impact the attitude of savers as the demand for tying up their cash wanes: the Bank of England estimated that £3bn flowed into instant accounts during February, while separate figures from UK Finance revealed that deposits into accounts requiring a tie-in fell by 5.6% year-on-year, highlighting the move away from fixed accounts and the continued popularity of easy access deals.

Those who do still want the security of a fixed bond may also find that the top-paying deals don't hang around for long, as providers become quicker to reduce rates to manage the flow of funds into their business – in many cases withdrawing deals entirely. But all may not be lost, as Rachel continues:

"Although it's unfortunate to see the positive pace of rises to one-year fixed bonds so abruptly change direction, the one-year average fixed bond return stands 0.20% higher than April 2018 (1.22%). Not only this, but savers will still find competitive rates to choose from, with Islamic banks for example consistently offering decent returns and so far opting not to cut rates.

"Whether the negative direction of rate changes will continue is unknown at this stage, but with the chance of a Bank of England rate rise this year seeming to have diminished – as there are now murmurings of a rate cut being more likely – savers considering a one-year fixed bond may not want to wait too long to take advantage of the best deals."