Buyers face sharp drop in bond returns

In December last year the average one-year fixed rate bond paid returns of 4.6 per cent, but this has fallen to an average of just 2.8 per cent, according to MoneyExpert.com.

The group said the steep fall meant savers who had earned interest of around 460 on a 10,000 investment in the past year would earn only 280 during the coming 12 months if they took out a similar deal.

Fixed rate bonds currently offer the best return for savers as banks and building societies reward people for locking up their money for a set period of time but these products have still been affected by the steep fall in the Bank of England base rate.

There were 47 one-year bonds paying returns of five per cent or more in December last year, while 22 offered interest of at least 5.5 per cent. But earlier this week there were only 17 one-year bonds paying more than 3.5 per cent and none paying five per cent, while 12 paid two per cent or less.

Pierre Williams, head of research at MoneyExpert.com, said: "Savers will struggle to generate anything like as much interest as they have done over the past 12 months.

"The beauty of bonds is that they pay a higher rate than most other forms of savings account, but with rates so low savers will need significant deposits to generate a return."