• NS&I to launch three-year green savings bond
  • The interest rate has not yet been released, but the bonds will not be indexed to inflation

The UK state-owned personal savings bank has announced plans to sell up to £ 15bn of green savings bonds to the public. National Savings & Investments (NS&I) will offer the bonds for a fixed three-year term, with the aim of raising funds for government-approved projects to combat or adapt to climate change.

Individual savers will be able to invest between £ 100 and £ 100,000, although the bank has yet to confirm the interest rate.

The plan, first teased by Chancellor Rishi Sunak in his March budget, echoes the idea of ​​a ‘UK stimulus bond’ put forward by Labor leader Sir Keir Starmer in February. At the time, Starmer had suggested that selling a retail bond would help connect the billions of pounds in savings accumulated during the pandemic with the need to invest in local communities and jobs, as well as businesses. scientific, technological and manufacturing.

As with Starmer’s plan, a successful launch would ultimately have to overcome two lofty and arguably conflicting hurdles. It is the need to sell debt at a price that represents value to the taxpayer, but at a return high enough to attract savers.

Failing the first test would leave the government open to the accusation of overpaying for funding. On July 1, the day after the official announcement of the NS&I program, the UK Debt Management Office sold £ 3.5bn of Treasury gilts maturing in 2025, following an auction more than twice oversubscribed.

The average accepted price – also known as the non-competitive award price – was 0.281 percent, with most of the debt placed with bidders below that level.

That’s a far cry from the highest paying three-year savings accounts on the market today, and it explains why the NS&I public savings bank cut interest rates on several of its products last November. Simply put, cheaper loan capital is available.

But NS&I still has a massive deposit base to draw on. According to Paragon Bank (PAG), whose three-year savings account pays a fixed interest rate of 1.21% per annum, UK savers have more than £ 800 billion in accounts that pay less than 0 , 25%.

To attract some of that money, NS&I would have to offer a higher savings rate than the broader market and even its own product line, which includes a 0.15% direct savings account and premium bonds. similar to lottery tickets.

This could prove to be a challenge. While the government recently sold £ 8 billion worth of bonds to institutional investors at an interest rate of 1.25%, they mature in 30 years. While the 100% government guarantee attached to bonds is appealing to many, yields are probably the main driver of investor appetite.

“The timing may not be right to reveal the rate right now,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown. “Over the past few weeks, smaller banks have been competing at the top of the fixed rate savings tables, pushing the most competitive rates up. This will likely go away as these banks fill their coffers, so NS&I may want to announce the rate at a time when it compares favorably to the best in the market. “

Inflation concerns could also help explain why the Treasury is biding its time. As the NS&I unveiled its green bond, Bank of England economist Andy Haldane quit his job while throwing broadband to his colleagues at the central bank, who he said is underestimating the risk of price increases and economic overheating. Haldane expects inflation to be close to 4 percent, or double the BoE’s target, by Christmas.

Rising inflation is often a concern for owners or buyers of fixed interest rate debt, as a depreciating currency erodes the value of future coupon payments and the initial investment. Unfortunately, savers who are hoping that green bonds could offer protection against rising inflation – via retail price index inflation-linked interest payments – should not hold their breath.

“Green Savings Bonds will not be indexed to inflation,” an NS&I spokesperson confirmed to us.

It may not be terminal. Indeed, it is possible that by creating a direct link between savers and projects that will help the UK meet its legal commitment to reach net zero by 2050, the Treasury is hoping that investors might be content. rates below the peak of the market. For some, participating in a new culture of owning green bonds – and helping fund zero-emission buses, hydrogen energy research and forest planting – will be a big draw.

Others will also want more details. NS&I’s announcement is also well below what a debt investor would consider an appropriate spending prospectus. This immediately drew criticism from the opposition. “We need a lot more detail and a tight guarantee that these bonds are spent correctly on green jobs and initiatives that will curb climate degradation,” said Bridget Phillipson, shadow chief secretary of the Treasury.

NS&I said it would release funds equal to the obligations to sell bonds to green projects within two years, and would periodically report on how the money is spent and the environmental benefits.

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