Where can you get a decent return on your money?

Back in July this year, I wrote that anyone with significant cash savings should take them to Northern Rock and pile them into the bank’s savings bonds – which, at the time, were offering to pay a fixed rate of interest at 7% a year for five years. Why? Because I was becoming more convinced that everyone fussing about inflation was worrying about the wrong thing.

Sure, the prices of most imported goods were rising fast, as were food prices, and there were lingering concerns that the unions might force through some hefty pay deals. But it was clear that the financial crisis was not going to be solved in a hurry. So the banks’ appetite for lending to bingeing consumers, would-be homeowners and businesses was disappearing. Lending was contracting at speed, consumers were retrenching and recession loomed around the corner.

With this in mind, the existence of inflation was beginning to look more like an echo of the credit bubble than a reflection of the real state of the global economy. So I expected the Bank of England to soon stop threatening inflation-busting rate rises and to start slashing base rates fast instead. And I said that when it does, the 7% five-year offer from Northern Rock is going to “look like one hell of a deal in retrospect”.

It already does. In the financial crisis of 2008, things have changed with shocking speed. I thought that UK interest rates might hit 2% by the end of next year or perhaps by early 2010. But, so fast have the economic statistics turned nasty and so fast have perceptions about the odds of deflation turned, that they are more likely to do so by the beginning of 2009 or – at this rate – perhaps even later this year. There is every chance that they will hit zero before the recession is out.

This means all sorts of nasty things (deflationary recessions are foul – just ask the Japanese) but, in particular, it means that getting 7% on your savings for one year – let alone for five years – is going to be a distant dream.

So, with the Bank of England base rate now at 3%, where do you get a decent return on your money now? Not Northern Rock. The best it offers nowadays is 4.5%, fixed to November 1 2009 and you can only get that on up to £25,000. That’s a miserable deal given that you could put £1m into the old 7% offer.

However, there is some good news. Most of the banks are as desperate for cash as they were five months ago so they haven’t yet cut rates as far as you might expect. You can still get 5.7% fixed at Halifax and 5.6% at Birmingham Midshires, albeit only for a year. And if you have a fund account or a self-invested personal pension at Hargreaves Lansdown you can also buy into a fixed-rate savings product – provided by the Bank of Scotland and maturing on November 6 next year – at 5.5%.

But if you are looking for good rates over a longer period, you are out of luck. Over a three-year period, most rates fall below 5% and, over five years, there is almost nothing on offer.

Given this, I have reluctantly turned to the equity markets in the search for yield. It is a depressing business. There isn’t much point in looking at anything with a yield below 5% if you can still get that in a risk-free savings account. But looking at the shares that are properly high yielding – Marks and Spencer, Man Group, Ladbrokes, Investec and so on – it is hard to see that the extra couple of percent is worth the risk you’d have to take on. They’re all set to keep suffering and you are bound to make capital losses in the medium term.

Instead, look for liquid blue-chip companies that not only have a good yield but a reasonably defensive business model (there aren’t many out there), low debt levels and good cash flows.

Candidates might include some of the big oils – BP (LON:BP) on 6.5% or Shell (LON:RDSB) on 5.4%. Otherwise, I can just about stomach the idea of the UK Commercial Property Fund which is paying over 8.5% and has no debt. James Ferguson of Pali International suggests that “special mention” be given to BT, which, in spite of all its troubles, is still technically yielding 14%.

But these all come with risk. If oil goes to $20, BP will surely cut its dividend. If too many tenants default or disappear, so will the UK Commercial Property Fund. I’d also say it’s a given that BT will have to cut its dividend in the not too distant future. On a positive note, even if it halves its dividend, you’ll still be getting 7%. On a negative note, that is the same return you could have locked into – risk free – a mere five months ago.

• This article was first published in the Financial Times