Answering the income dilemma
“Investors are likely to find the search for sustainable income even more challenging in a...
My first ever mortgage was variable, but ‘capped’ at 5.75%. Yes, 5.75%. When I took it out in 1999, I knew that, should the base rate go above that amount again – as it had done for a couple of years previously – my repayments wouldn’t increase. I also had a cash savings account that paid 10% per annum. Yes, 10%.
For almost a decade, interest rates bobbed up and down between 5.75% and 3.5%, while the interest on cash fell to a ‘dismal’ 5%.
Then along came the great financial crisis in 2008 and the Bank of England slashed interest rates to an ‘emergency’ level of 0.5%. And there they stayed until August 2016 – when Brexit forced them to a lower 0.25%. Many cash accounts fell to near zero.
Interest rates where just starting to creep back up and were at 0.75%, when Covid put a spanner in the works in March 2020, and they were once again slashed – this time to 0.1%. At the same time, government borrowing has spiralled upwards, first during the financial crisis and then again as furlough schemes have been subsidised and bonds purchased – all in the name of keeping the economy afloat during lockdowns.
Today, the question seems to be: will interest rates ever rise again?
If mortgage rates are anything to go by, the answer is certainly not in the short term. Lenders have been slashing rates in recent weeks, with HSBC the latest to join the party of sub-1% offers, with a two-year fixed rate of 0.89% and a five-year alternative of 0.99%.
And hedge fund manager, Crispin Odey, has gone one step further and said that the Bank of England will never put up interest rates, despite a warning that inflation will soar to 10-year highs this year. According to the Daily Telegraph, Mr Odey said the Bank of England cannot afford to put up interest rates because this will drive up Government borrowing costs.
And while that’s good news for other borrowers it’s bad news for cash savers, especially as inflation is on the rise – the value of their hard-earned cash will fall real terms, and that could continue into 2022 and beyond.
The Bank of England is forecasting inflation will reach 4% by the end of this year – double its 2% target. Usually, interest rates would rise to help keep inflation under control, but the Bank believes this inflation will be transitory and updated forecasts show that interest rates are only expected to rise to 0.2% next year and to 0.5% by August 2024 – certainly nowhere near the level they were at the turn of the millennium.
However, investors who are happy to take a higher level of risk and are willing to keep their money in the stock or bond markets for a decent amount of time (ideally five years or longer), could generate a higher level of income by investing rather than saving.
|1||Man GLG High Yield Opportunities||5.60%|
|2||M&G Emerging Markets Bond||4.93%|
|3||VT Momentum Diversified Income||4.85%|
|5||Man GLG Income||4.50%|
|6||VT Gravis UK Infrastructure Income||4.50%|
|7||The City of London Investment Trust||4.48%|
|8||Liontrust Monthly Income Bond||4.40%|
|9||TwentyFour Dynamic Bond||4.20%|
|10||Baillie Gifford High Yield Bond||4.10%|
*Source: FE fundinfo, 30 June 2021