Are tracker bonds a smart investment?

Savers are casting around in increasing desperation for some lucrative returns on their investments. With banks and building societies offering a bewildering range of products, it's difficult to decide how tracker bonds shape up against the alternatives. It's only sensible to check out all the variables before you commit to an investment.

What is a tracker bond?

Tracker bonds offer a fluctuating rate of interest, which tracks the Bank of England base rate. Banks or building societies offer an interest rate which is a fixed percentage above the base rate.

Essentially investors in a tracker bond are gambling on the base rate rising. To make a substantial profit on their investment, they would need base rates to rise sharply.

A cursory look at most of the investment sites suggests that this is unlikely. Indeed, many are predicting that interest rates will remain rock-bottom for some time, and when they do rise, it will be very gradually.

Deciding on the advisability of a tracker bond comes down to making a comparison between rival products. As an example a Santander tracker, offering a rate of 2.5 percent over the base rate would pay a rate of 3.25% if interest rates rose 0.25%. It does not require too much shopping around to discover that there are already fixed rate bonds paying similar or higher interest rates.

Investing in tracker bonds requires a certain degree of understanding of the economic climate, and an informed assessment of when the Bank of England is likely to raise interest rates. Follow the expert analysis online and in the financial press, and you will have a better chance of making the right decision.

Watch the markets

Savings rates are all about fine nuances, so it can pay to keep an eye on the market. Banks and building societies are constantly launching new products. If you can find tracker bonds that have the potential to outstrip fixed rate investments, it's worth investigating more closely. Act decisively, as some new accounts are only offered for a matter of days.

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