Q&A: Which retail savings bond option is best for a beginner?
The decision between inflation-linked and fixed-rate bonds is down to how fearful you are of inflation
Q: My question on government retail savings bonds is two-pronged:
1. Will the money saved in the government retail savings bonds that are inflation-linked continue to attract its initial interest rate during the coronavirus crisis?
2. Between inflation-linked and fixed bonds, which is the best for a beginner saver/investor? — gaugelo, via e-mail
A: Terry Msomi, director of bonds at the Treasury, replies:
I can’t say whether the nominal rate on inflation-linked bonds will drop or remain the same. What might change is the inflation adjustment that takes place at the end of May and November. This would depend on what the average rate of inflation has been in the previous six months of the year.
Given the halt in economic activity over the last two months, inflation has likely dropped and so that might have an impact on our inflation-linked bonds.
In general, during times of increasing or high inflation, inflation-linked bonds are a good option because not only do you keep up with inflation, you are guaranteed to beat inflation through the additional nominal rate offered.
This does not mean that fixed-rate bonds aren’t as good if the nominal rate we offer is significantly higher than inflation, as has been the case for most of the history of retail bonds.
In times of high inflation the decision between inflation-linked and fixed-rate bonds is down to how fearful you, as the investor, are of inflation. The higher the inflation rate, the better for inflation-linked bonds.
In times of low inflation, fixed rates might be superior if the nominal rates offered are higher and inflation is expected to continue falling or remain low. If nominal rates on the fixed-rate bonds drop below inflation, inflation-linked bonds would be the better option.
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