Here’s an interesting perspective, from Bengt Saelensminde at Moneyweek, on the re launched National Savings Inflation Bond:

It’s one of the most pressing questions of the day – how do you find a safe way to protect your wealth against inflation?

Gold has been the first port of call during the money printing frenzy of the last few years. But in recent months, many investors have been looking for a more stable alternative – one that will protect against inflation and not cause you to lose any sleep.  Maybe that explains why the re-launch of the National Savings & Investment (NSI) inflation bond caused such a stir this week. Over the next few months, it will no doubt prove popular.

Why the banks killed this great bond

You may remember the original NSI inflation-busting bond. It promised to pay 1% above inflation but was whipped off the market last July.

It offered tax-free returns on a bond linked to an ever-climbing inflation rate and all backed by the state… so of course it had to be withdrawn. The struggling banks just couldn’t compete with a government-sponsored giveaway.

But today things are different. Now the sun is shining on the banks and it’s the government that’s struggling. So the government-backed bond is back. They’re expecting some strong sales. And on the face of it looks a good option. But I’ve taken a close look at this offering. And I think you need to be wary. Let me start by explaining why I think NSI could catch a great deal of private investors over the next few months…

The treasury badly needs funds

The treasury has told NSI to go out and find some cash. The new NSI bond is looking to raise £2bn from British investors. And that probably won’t be a problem. I mean they’ve got a great marketing story…

First, income on these bonds is tax-free – not many issuers can offer that!

Second, these bonds were withdrawn because of huge demand from investors. Now they’re being issued again, there’ll be a queue of investors just waiting for their inflation linked returns. After all, inflation has whipped itself up to 5.3%.

But this is what a lot of investors are missing: things have changed since last July…

The second bite of the cherry isn’t so sweet

Let’s start with the interest. Before the bonds were withdrawn they promised you 1% above inflation (RPI). But this time around they’re only promising ½% over RPI.

And the second problem is the inflation rate itself. When NSI withdrew the bond commodities were on the rise and the pound was in the doldrums. Both these factors were stoking up inflation. But we’ve already suffered that inflation. Commodities have recently fallen back and the pound has stopped falling. And with austerity plans kicking in, inflation will surely fall back towards the end of the year.

In fact, if you look at the NSI 5-year fixed interest bond (also released this week), it’s offering a more sober 2.25% fixed for 5 years. It looks like NSI are expecting inflation to fall way back – and I agree.

I fear that investors are being suckered in at the worst moment, convinced that yesterday’s inflation is here to stay. But if safety is your primary concern, then by all means go for the NSI bond, but just remember, it’ll never pay you out a positive ‘real’ return on your money. The best you can ever hope for is to keep up with inflation.

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