The state run National Savings and Investments (NS & I) has unexpectedly pulled two of their popular and market leading bond products. The one year 3.95% and two year 4.25% rates were taken off the market after building societies and banks complained that they were in effect unfair competition. The Post Office, although state owned is actually a separate entity to NS & I, has also been offering a one year product at 3.7%.

Demand for these NS & I products had been far greater than expected since their introduction on 26th October.

It is argued that NS & I are unfairly placed as they can take advantage of the explicit government guarantee that the money can never be lost. Although not ‘Gilts’, the NS & I products are seen as fully protected in the same way as Gilts are. Unlike with other financial institutions, who only have £50,000 of theirs guaranteed. Not only that, there are other institutions such as the aforementioned Post Office, Northern Rock and C&G that get this inferred guarantee too.

All this is seen as skewing the market in favour of the state owned institutions. Generally, the higher the safety of the provider the lower the rate of return the customer should expect in the form of interest received.

But why would the government through the NS & I be willing to pay such market leading rates? Unless of course, they desperately needed the money and think they won’t get it through the issue of more Gilts. As these products have trawled in an extra £12-13 billion then one assumes this may be the case.

Although withdrawn for the moment, it may be that the appetite amongst the public would still be strong for these products into the future. So we may seem them resurface should investors start to turn away from Gilts.

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