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Why the Nationwide is paying 5%

The Nationwide’s launch of five year bonds paying 5% has got it a lot of attention in the media (a lot more than the Barnsley Building Society is getting by paying 5.1%). So why is it willing to pay so much more than the 0.5% base rate?

This time the obvious answer is the right one (and only worth mentioning here because so much of the media omits it). Take a look at the Bank of England’s current chart of the yield curve. If you do not understand it, here is an explanation of the yield curve.

Nationwide is offering pretty much the going rate — it is just that there are not many consumer products with such long durations to compare it with. Of course the market may be wrong, and rates may not rise so much — but they could equally well rise even more. Recovery is likely over the next few years, and so will the need (for the Bank of England) to increase interest rates to control inflation.

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