Blow for savers as fixed-rate bond returns drop

The top rate paid on a one-year fixed-rate bond for someone with 10,000 to invest has dropped from 3.15 per cent to 3 per cent since September 7, while returns on a two-year bond have fallen by 0.2 per cent to 3.6 per cent.

Interest paid on three and five-year bonds have also been affected, with the best rates available falling by 0.15 per cent and 0.1 per cent respectively, according to financial website moneysupermarket. com.

The news is a blow for beleaguered savers, as fixed-rate bonds currently offer the highest returns on people's cash.

The rates paid on the products had jumped during July, when a new entrant into the market, India's Bank of Baroda, launched headline-grabbing rates.

The increase in competition forced other providers to respond, with higher returns as well.

But moneysupermarket.com said rates were now falling back again, after banks had attracted large inflows of cash.

Kevin Mountford, head of banking at moneysupermarket.com, said: "Over the last few of months, we have seen the likes of Bank of Baroda introduce market-leading fixed-rate savings products to attract customers in the online space.

"The launch boosted competition in the market and other providers increased their rates as a result.

"However, having attracted large inflows of money, we are now starting to see rates drop back as providers actively manage their funding requirements."

But despite the fall in the market leading rates, fixed- rate bonds still represent the best home for people who are prepared to lock up their money for a set period of time.

Recent figures from the Bank of England showed that while the average return paid on a fixed-rate bond was 2.37 per cent during August, branch-based instant access accounts paid an average of just 0.23 per cent, while notice ones were only a little better at 0.91 per cent.

Mr Mountford said: "Despite the recent drop in rates, bonds will continue to dominate the savings market for some time to come and we would urge anyone looking to lock their money away to do so now before rates drop fur-ther."