Tuesday, 1 February 2011

Cash Bond Rates on the Rise (UK)

Using fixed-rate cash bonds is part of the DIY Income Investor strategy - they form part of the Income Pyramid Level 3 cash 'buffer' to provide for life's up's and down's. The rates on offer for these bonds is starting to increase - this implies that you should be cautious about taking out any long-term bonds at the moment.

A recent article in This is Money (UK) points out the connection between cash bond rates and the level of swap rates (the banks' cost of raising fixed term funding on the money markets). The Bank of England 'base rate' has become academic.

The safest strategy may be to keep any cash in short-term bonds. In the first week of 2011, Kent Reliance launched a 3.7% two-year bond – the best available.

However, one exception (to the short-term recommendation) would be Northern Rock, which is paying 4.3% (3.44% after basic rate tax) — guaranteed for five years. But, unusually for a fixed-rate bond, you can take your money out without paying a penalty if you give 180 days' notice.

As a possible hedge against inflation, BM Savings are marketing a 5-year index-linked bond, paying 0.25% over the Retail Prices Index.

As reported by another article in This is Money, the cost of living — as measured by the retail prices index — is rising fast at 4.8%, and is expected to go through the 5% barrier this year.  The article also summarises the current cash bond best deals.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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