The UK government has withdrawn some of its most popular retail savings bonds, saying the record-breaking rally in debt markets this year has made it impossible to continue offering the products to the public.
National Savings & Investments, the state-backed savings provider, said on Monday that its one- and three-year Guaranteed Growth Bonds and Guaranteed Income Bonds, which it recently described as “extremely popular”, were no longer on general sale. It blamed “exceptionally low gilt yields” for the move, saying it was cheaper for the government to raise money in wholesale markets than through individual investors.
The changes are the latest demonstration of the challenges facing savers in search of safe but juicy returns in a world of rock-bottom bond yields. Andrew Hagger, personal finance expert and founder of consumer website MoneyComms, said scrapping the bonds was “another body blow for UK savers . . . who will soon be looking for a new home for their savings pots”.
NS&I said it had made the changes to “rebalance the interests of savers and taxpayers, and to help maintain the stability of the broader financial services sector”.
“Rates for similar competitor products have been falling while the measure NS&I uses for raising cost-effective finance for the government is lower than target,” it said in a statement.
Customers investing in NS&I products are lending to the UK government, which pays them interest and guarantees 100 per cent security on all deposits. Although savers can grab higher rates elsewhere, the backing from the Treasury has made this a popular strategy.
By offering favourable rates to private savers, the government has in effect been paying over the odds on part of its borrowings, compared to what it would pay in public bond markets dominated by pension funds, insurers, hedge funds and other official investors. Following a global bond market rally that has pushed yields to record lows, that gap has widened. The yield on the UK’s one-year gilt is currently just 0.41 per cent, dropping from 0.77 per cent at the start of the year.
Three-year gilt yields are even lower, at 0.3 per cent, while the UK government can borrow more cheaply over 30 years — at 0.96 per cent — than the rate NS&I was offering on a one-year savings bond.
The money raised from individual savers forms a significant portion of the government’s funding. The Debt Management Office has said it expected to raise £10.8bn from NS&I in the current financial year, roughly 10 per cent of its gross financing requirement.
“The government could borrow at a much lower rate on bond markets,” said George Buckley, chief UK economist at Nomura. “What they are saying is they can’t justify giving a subsidy to those who are willing or able to save with NS&I.”
Pension funds, which have to hold long-dated government bonds to meet their obligations to future retirees, have also been hurt by the very low interest rates available on safe assets.
As at March 31 this year, more than 750,000 UK savers collectively held £20.5bn in the affected products. NS&I said these customers would still be able to “roll over” their bonds at the end of the term, but interest rates would be reduced by 0.25 percentage points across the board.
This will reduce the highest rate payable on three-year savings bonds to 1.7 per cent, falling to 1.25 per cent on the one-year bonds. Rates on two-year and five-year bonds, which had previously been withdrawn from general sale, will also be cut.
Last June, NS&I slashed the amount retail bondholders were able to deposit from £1m to £10,000.