NS&I Green Savings Bond Issue to Create ‘Uncomfortable Friction for Chancellor’ | Personal Finances | Finance
NS&I will launch Green Savings Bonds by the end of this year and while full product details have yet to be released, new evidence has emerged that shows savers and investors are keen to take advantage of this type. sustainable options. Today, Her Majesty’s Treasury confirmed that billions have been raised for “green projects” as the government launches its very first Green Gilt, which Rishi Sunak hailed as a key step in addressing an array of environmental challenges. . However, further analysis of this news showed that if interest rates on NS&I’s green bond did not reach a certain threshold, taxpayers could face drastic costs.
According to the government, £ 10bn was raised this morning from the sale of the UK’s very first Green Gilt, the largest inaugural green issue by a sovereign, with the largest backlog ever for a transaction sovereign green. A second issue will be issued later in the following year and HM Treasury detailed Green Gilts will raise a minimum of £ 15bn for green government projects such as zero emission buses, offshore wind turbines and carbon decarbonization programs. houses and buildings during this exercise.
Rishi Sunak commented: “Green finance is vital in helping us meet the environmental challenges we face, and the launch of our first green bond is a signal that the UK continues to be a global leader in this area. .
“This funding will be used to fund vital green government projects across the country, including things like clean transportation, renewable energy and the preservation of our natural environment. By helping us to build back better and greener, it will also help create jobs during the transition. to net zero. “
Demand for this gilding has remained incredibly high as while £ 10bn has been sold, reports suggest more than £ 100bn of offers have been received.
While the government only has an additional £ 5bn of UK green gilts issuance expected this year, but NS&I plans to issue £ 15bn of its own green bonds to retail savers by end of 2021.
READ MORE: Inflation hits record high as savings lose ‘value in real terms’
While this is likely to attract similar levels of interest as well, taxpayers could face high costs due to the demand.
Laith Khalaf, head of investment analysis at AJ Bell, explained: “The new guilt-free gilt has been a huge success, with institutional investors scrambling for a share of the stock. Bonds are already in high demand, thanks to the presence of a price insensitive buyer in the form of the Bank of England, as well as regulations that encourage pension plans and insurance companies to own gilts. Add a green tint that can help pension administrators bolster their ESG credentials, and you’ve got massive sales potential.The fact that there is also so little supply has also undoubtedly helped put bums out. the seats. Only £ 15bn of green gilts are expected this year, a drop in the ocean from the £ 250bn of bonds the government intends to issue this fiscal year.
“The government will also appeal to retail savers for green funds, with the £ 15 billion issuance of the NS&I Green Savings Bond, which will be a three-year fixed term product. In theory, there should be strong demand for the NS&I bond, given its green credentials and Treasury support. However, with cash rates so low, savers will want to make sure they get a competitive rate, while also meeting their environmental concerns.
“This creates an uncomfortable friction for the Chancellor, between giving savers a decent rate and offering good value for the taxpayer. The best three-year cash rates are currently around 1.8%, but the government can borrow money in the conventional gilt market at less than 0.4% for three years, which it can then invest. in green projects if he wishes.
DO NOT MISS :
HSBC UK offers savers a way to increase bank balance by £ 110 [INSIGHT]
HMRC warns thousands of savers miss “hidden pot of gold” [WARNING]
The European Central Bank just did something that suggests it is worried [EXPERT]
“If NS&I were to issue its £ 15bn Green Bond with a market rate of 1.8%, it would cost the taxpayer around £ 210m a year, at a time when the coffers of the Exchequer were exhausted by the costs of the pandemic.On the other hand, issuing a three-year bond with a 0.4% gilt yield risks many savers turning a blind eye to the green savings bond while much more attractive rates are available in the market.
“There will of course be questions as to whether these green finance initiatives are entirely necessary, given that the government could simply fundraise through classic gilts and NS&I accounts to fund their green spending priorities. It may be, but these green products at least offer an eco-friendly option for savers and investors who want to do their part and would like to see their money put to good use.
NS&I has confirmed that its Green Bonds will be set for a fixed three-year term, and these will be designed to be held for the full term. However, a “cooling off period” will apply during the first 30 days of investment.
Earlier this week, Khalaf explained how important the proposed interest rate for the green bond will be for savers.
“The new NS&I bond that the Chancellor is planning will offer savers the option of a green house for their money, but its success will likely be determined by the interest rate offered,” he said.
“Savers showed they were ready to vote with their feet when NS&I cut interest rates on a series of accounts last November, and if the Green Savings Bond offers a paltry interest rate, it might not generate public demand.
“On the other hand, if the interest rate is too high, it will raise questions about the cost to the taxpayer, because the Green Savings Bond is ultimately just a government loan under another name. .
“Savers will not invest directly in renewable energy projects, but rather lend money to the government to do so, in exchange for interest on their money.”
At the end of August, it was confirmed that the British had withdrawn around £ 13bn from NS&I between April and June 2021. More than double the £ 6.1bn withdrawn in 2020.
NS&I addressed this issue at the time: “The impact of the interest rate cuts made by NS&I towards the end of 2020 continued to be reflected in the volume of NS&I exits recorded in the first quarter of 2021-22, while that the openness of the economy has also had an effect on the behavior of savers.
Currently, NS&I offers the following interest rates on its range of savings products:
- Premium bonds: one percent of the annual price fund rate
- ISA junior: 1.5%
- Income bonds: 0.01%
- Direct ISA: 0.1%
- Direct economy 0.15%
- Investment account: 0.01%
Ian Ackerley, Managing Director of NS&I, spoke of the company’s rate cuts in September 2020: “Cutting interest rates is always a tough decision. In April, we rolled back the interest rate cuts announced in February and slated for May 1.
“With successive Bank of England base rate cuts in March and subsequent interest rate cuts by other vendors, several of our products have become ‘the best buy’ and we have experienced demand extremely high as a result.
“It is important that we strike a balance between the interests of savers, taxpayers and the broader financial services industry; and it is time for NS&I to return to a more normal competitive position for our products. “