Sam Benstead runs through the most important news stories of the week for bond investors.
Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.
Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.
Here’s what you need to know this week.
Will they, won’t they?
The Bank of England has been sending mixed messages to financial markets about its commitment to step in and support the UK government bond (or gilt) market.
Liability driven pension funds have had to sell their long-dated gilts to meet margin calls due to the sharp fall in bond prices.
It’s a complicated area, but in short a “doom loop” was beginning to appear, with plummeting gilt prices causing pension funds to sell more gilts, and therefore sending prices lower still. In response, the Bank of England two weeks ago said it had put aside £65 billion to backstop the market, but that guarantee would last just two weeks. Today, two weeks is up.
- Bond Watch: has the Bank of England saved the bond market?
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- Benstead on Bonds: there’s finally an alternative to stocks
The Financial Times reported that the Bank might extend that deadline, which caused the gilt market to rally, but then Governor Andrew Bailey said at a conference in New York this week the deadline stands and “we will be out by the end of the week”.
The confusion sowed by Bailey has been causing havoc in one of the world’s most important bond markets. The gilt market is normally relatively stable, and it is expected to be that way by the large pension funds and other institutional investors that need to own gilts and accurately map out their expected earnings.
Gilt yields return to pre-intervention levels
Despite the Bank of England’s initial intervention in the bond market two weeks ago, which caused gilt prices to rise and yields to fall, UK government debt reached the same yield this week that they were at when the panic provoked the intervention in the first place.
On 27 September, the 10-year gilt topped out at a 4.5% yield, and the 30-year hit 5%. Those highs were nearly reached this week as investors bet against the credibility of the UK government and worried that the Bank of England would not do enough to support the gilt market. However, bond prices have since risen, sending yields lower, on rumours that the government may reverse another of its mini-budget policies by sticking with the planned rise in corporation tax to 25%.
Volatility is set to continue. Faisal Manji, global manager research director at RBC Wealth Management, says: “The range of outcomes is pretty wide. Central banks are in the middle of historically steep hiking cycles and are also trying to unwind their asset purchase programmes.
“Inflation is proving to be anything but transitory, with de-globalisation and de-carbonisation supporting that trend.”
- Ask ii: can I get a yield of 4% or more from bonds like I can from equities?
- Recessions are becoming more likely – here’s how to invest
- Read more articles by Sam Benstead
Some gilts have now fallen 50% this year
The sell-off in UK government bonds, caused by inflation and the expectation that interest rates will have to rise a lot, as well as a lack of market credibility in the UK government, means that some gilts have now fallen by more than 50% this year.
This is not what you would expect from a “safe” asset class that pensioners often rely on to stabilise the equity component of their portfolios and draw an income.
For example, TR73, a gilt that matures in 2073, and paid a 0.125% coupon when it was issued in February this year, has fallen from £99.50 in March to £35 today, a 65% drop. TG61, issued in 2020 and paying a 0.5% coupon, maturing in 2061, has fallen from £96 in March this year to £30 today.
A basket of UK gilts of different maturities has collapsed 30% and a basket of index-linked gilts is down 46%.
Savers who thought they were safe in the bond market have been given a shock, but prospective bond investors will be licking their lips at the yields on offer. They can get more than 4% by lending to the UK government for just a couple of years.
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