PERSONAL ACCOUNT

Now is not the time to take out a fixed-rate savings account

If the message to mortgage borrowers is an urgent call to lock in to a low rate now, then here’s the equivalent message to savers: whatever you do, steer away from fixed-rate savings accounts.

If interest rates are rising then savers and investors need know just one thing: assets that pay a fixed return are suddenly becoming a lot riskier.

And that means that pays a fixed return. Government bonds (or “gilts” in Britain) pay a fixed rate and they have been walloped in recent weeks: more than $1 trillion of US government debt has been sold in the past week alone.

These bonds are sold because investors count on more attractive, higher-yielding assets being issued in future. Who wants a bond that yields next to nothing, even if it was very attractive a few months ago?

The same holds true for fixed-rate savings accounts.

The graph, right, shows how far and fast rates on three-year savings bonds have fallen in recent years. These are the average three-year rates offered by banks and building societies, with data collated by the Bank of England.

At the moment the average threeyear rate is 1.05pc.

The best three-year bond pays more than 1.6pc (Ikano Bank), so there are better returns out there. But I’d caution against tying up cash in that way. With rates as low as they are, every few percentage points makes a difference. As there’s a good chance of better offers in coming months, I’d wait.

You could mix the money in a range of shorter-life accounts in the meantime. A one-year bond from Charter Savings Bank pays 1.4pc, for example, and a top easy-access account pays 0.4pc.

Something similar is happening – or likely to happen – in those shares that in recent years have become regarded as stand-ins for bonds. Known as “bond proxies”, they’re usually firms that deliver dependable if not magnificent returns, selling items that customers need come rain or shine. Tobacco companies’ shares are an example.

Cautious investors desperate for dividend income piled into these stocks, pushing up their prices.

That may now all unravel if, as income fund manager Chris White