High-Yield Savings Accounts - Is it a time to invest in Bonds?
Do you have some savings in your bank account? Have you checked the interest rate offered by your bank? The Bank of England announced an increase in the interest rates from 5.00% to 5.25% on August 3rd and remained at the same level in November. This information alters the base rate, which is the rate that determines the interest rate on a savings account. According to The Bank of England, fixed savings rates rose to one of the highest rates. However, not all banks have passed on the interest rates to the end customers. It is worthwhile to check what you are earning in your savings account.
Savings accounts being offered by a variety of financial institutions at various different interest rates would be a deciding factor in understanding which bank offers the best interest. The main difference would be to evaluate all savings accounts according to the lock-up period i.e. the length of time the money must be kept in the bank, liquidity i.e. can you access the money instantly and the interest rate offered. You may also be interested in finding out if the bank can provide some monthly income on the savings, or if they provide the interest on your savings on a yearly basis.
Examples of top savings rates offered by different banks:
Top savings accounts. Here are the highest paying traditional savings accounts.
NatWest Group's Ulster Bank
(max two withdrawals a year, rate drops to1.5% from third onwards)
Monthly or annually
(includes bonus of1.15% for first 12 months)
(includes bonus of2.5% until 30 Nov 2024)
(no joint accounts)
When choosing the right high-yield savings account there are several options. One of which is a regular savings bank account. You will be able to access the money instantly, however, they have lower interest rates than longer-term saving products. There are high-yield savings accounts, on the other hand, which pay higher interest rates than regular savings accounts but they have minimum deposit requirements. Another option would be a fixed-term savings account which is an account that has a higher interest rate compared to other savings accounts as there is a fixed time period when the money cannot be withdrawn from the account. This time period could last from one month to five years and certain penalties could be applied if withdrawal is early. Other options for cash savings are bonds.
What are saving bonds and how do they work?
Saving bonds are short-term investments. Unlike easy access, your account would be locked for an agreed-upon period of time. Generally speaking, the longer you commit to keeping your money in the bank, this would correlate to higher the interest rate.
One of the main advantages of investing in bonds would be a direct benefit to your investment portfolio. Firstly, bonds provide a stable source of income while reducing some of the uncertainty associated with investments. Savings is a type of investment that helps increase income while taking less risk as compared to other investments. If you have a sum of money deposited in the bank account in which there are no future plans to withdraw, then it could be used to earn some income from your savings. This time period spans from six months to five years and continuous interest would be earned on a monthly basis or yearly if you choose to. Generally speaking, there would not be the opportunity to cancel or withdraw the amount until the contract expires although there is flexibility with various accounts. For example, some banks may offer you three withdrawals, not more than 10% of your savings without penalties.
Why should I invest in bonds?
The bond markets have started to stabilise as inflation expectations have begun to go down and investors are now able to harvest significantly higher yields, be it in government bonds or the debt of companies – or ‘corporate’ bonds. We are now left with a bond market priced more realistically for the risks of an ongoing higher inflation and interest rate environment, and an asset class that we think offers significant opportunities. When an investor buys a bond, the coupon is locked in for the whole term. If the coupon is, say, 5%, they can be assured that’s what they will receive each year until the capital is paid back (known as ‘redemption’). With a savings account, the bank may change the rate at any time, which they will if interest rates fall. If we envisage that interest rates are going to decrease, it may be a good idea to lock in some coupons and ensure a guaranteed rate of income.
Is now a good time to invest in bonds?
This depends on inflation and economic data going forward, but the Federal Reserve, Bank of England and European Central Bank have all signalled interest rates are close to peaking. The earlier this becomes more certain the better the prospects will be for bonds and those who want to invest in them. Yields should fall if and when inflation and interest rate expectations subside, and prices should rise. Importantly, this means bonds are regaining their diversification benefits versus shares.
That is why we believe there is now good value in bond investment including government bonds and corporate bonds.
However, if there is a deep recession, there could be a scenario in which companies will not be able to pay off debts. There could be a negative return on the bonds.
Different types of fixed-income investments:
1. Individual bonds.
It is possible for investors to buy individual bonds themselves.
States and other municipalities issue these bonds (also known as “municipal bonds” or “municipal bonds”). They are generally safe because the publisher can collect money through taxes. Interest on these bonds is tax-free at the federal and state level. Benefits are generally lower than federal income tax due to tax advantages.
These bonds are issued by companies and cover the entire spectrum of credit risks. Interest on these bonds is subject to federal and state taxes. Because these bonds are not as safe as government bonds, they are more valuable.
2. Bond funds
Rather than buy bonds individually, investors can buy a package through a bond fund. By investing in multiple bonds, you diversify to reduce the risks by working alongside other investors and investing collectively into a portfolio. This also enables the investor to gain access to a wider range of bonds to invest in a more efficient manner.
Exchange-traded funds (ETFs) allow you to join a collective portfolio of investments. There are a variety of categories to invest in such as bonds, gilts and other fixed interest areas. Similar to shares, they can be traded on the stock exchange.
4. High yield options
There are higher yield options for bonds, although it is important to proceed with caution as the higher yield investments can be a warning sign because automatically the risks of capital loss, and default would be higher. These risks could however be mitigated through diversification and different bond funds react differently to changing economic circumstances.
Written by Joy Serena Evenden (Finance Monthly)
Friday 10th November 2023, 12:25PM
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