UK fixed rate bond holders face a £1bn shortfall if they try and roll over into today’s available best buys

17th July 2013

UK  fixed rate bond  investors  face a £1bn shortfall in returns if they roll over their savings into today’s best buy products because of the drop in rates according to research from HSBC.

The analysis shows that rates on some products have fallen significantly – up to 2.47% on some products. Almost 5.3 million fixed rate products worth nearly £93 billion will mature in  2013 with the largest number due to mature in November  or some 568,455.

Of these  products, 2.8 million have matured over the last six months, but the recent  fall in rates means bondholders face a £1 billion fall in income if they reinvest their savings pot into similar products.

All  fixed  rate  products  have been affected by the drop in rates and now offer  lower  returns  if  savers  were  to  reinvest  their money into the best-buy  products  currently available. However, the biggest falls  in income will be felt by 3, 5 and 2 year bond holders with eye-watering falls of 52%,  50%  and  45% respectively says the bank. It says that last year, holders of one year and 18 month bonds  saw  a slight rise in income, however even these product holders can now expect a fall in income of 39% and 38% respectively HSBC says the smallest  fall in income will be felt by 6 month bond holders, but at 12% this drop will still have a significant impact. As well as the biggest drop in overall income, holders of 3 year bonds will suffer  the  biggest  drop  in individual income. The average investment in these bonds currently stands at £22,333 and if this were to be reinvested in the current best-buy products on offer, investors can expect a return of £3,037 – a  fall  of  £1,576  compared to their last investment in 3 year bonds.

HSBC says the fall in income across all fixed rate products is a result of a drop in average  best-buy  AERs  available.  It says the falls vary from 0.16% for 6 month bonds  to  2.47%  for 5 year bonds. Despite longer term bonds suffering the  biggest  falls  in  AERs, these products still offer higher rates than the shorter term investment options.

For  those  investors  in the 3.1 million fixed rate products due to mature over  the  remainder  of 2013 – particularly those 2, 3 and 5 year bonds in July and November (see graph below) – HSBC recommends that people seriously consider what the best possible home for their savings is.

Bruno Genovese, head of savings at HSBC, says: “As  an  increase  in  interest  rates  continues  to look further into the distance,  the  knock on downward pressure being applied to saving rates is affecting the incomes of investors.

“Many savers value the guaranteed income and security offered by fixed rate products.  However,  those  who want to reinvest their savings from matured fixed  rate  products  into  comparable deals this year may find that their income  drops  significantly. Savers need to consider all available options and this may not be to simply reinvest their savings in a similar product.

“Diversifying  savings  portfolios to have a variety of products can ensure that investors lessen the impact of falling interest rates. At HSBC, we can offer a range  of  options  which  offer  a more stable way to invest for long-term growth.”

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