Beat the bank with bonds

BANKS and building societies have launched a stream of new fixed-rate bonds, with top deals now paying more than 5%

They offer savers a window of opportunity to fix in at top rates for one, two or three years.

Both Portman and Norwich & Peterborough building societies’ new bonds pay 4.2% after 20% savings tax (5.25%) for two years. At Dunfermline BS you can earn 4.44% (5.55%) fixed for three years.

Experts say bonds offering a substantial 0.5% to 0.75% over the Bank of England base rate - currently 4.5% - are good value.

You can earn more than 5% before tax (see table) on fixed-rate bonds because the money market, where

banks and building societies buy them before selling them on to customers, has already added predicted base rate rises to its prices.

Anthony O’Brien, director of fixed interest at Barclays Capital, says: ‘The market is predicting a 0.25% rise in August and a 50-50 chance of another hike by the end of the year. If the second rise doesn’t come then, the market expects it to do so by next March.’

The expected move up comes as interest rates around the world have risen amid fears of climbing inflation. This could lead the Bank of England to raise the base rate to stop inflation breaking its long-term 2% target.

But economists are divided about whether the base rate will rise, and even if it does, they expect a peak of 5%.