Bond Watch: bonds rising as stocks fall

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.            

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Bonds’ safe-haven status delivers 

Bonds rose in value this week, pushing yields lower, as investors ditched equities.  

The cause of the stock market sell-off, which has sent the S&P 500 down 2% in a week and the FTSE 100 down 1.2%, was weak manufacturing data in the United States. This sparked worries of an economic slowdown, which would be bad news for stock market profits. 

But a slowing economy is not necessarily bad news for bonds. In fact, it could be good news, as central banks will be more eager to cut interest rates, which generally cause bond prices to rise. 

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And given that the safest bonds, such as those from developed world governments and the highest “investment grade” rated companies, are very unlikely to default on their payments, they also act as a safe haven when investors are worried.  

The Bloomberg Global Aggregate index of bonds has risen 0.8% since Monday. Yields on gilts dropped, with the 10-year gilt now paying 3.9%, two-year gilts paying 4% and three-year gilts paying 3.7%.  

Investors take money out of bonds in August 

Over August, bonds started the month strongly, rising 2%, but then ended the month down 0.6%. 

UK-based investors responded by taking money out of fixed-income funds, with data group Calastone reporting that outflows “surged” to £516 million, the third worst on record for a month. 

Meanwhile, money market funds – which try and deliver a “cash-like” return profile by investing in short-term bonds and making use of bank deposits – saw the largest inflows in a year at £592 million.  

Money market yields are closely tied to the Bank of England base rate, which is currently 5%. This means they actually yield more than many riskier bond funds.  

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But while fund investors withdrew from fixed-income funds, institutional investors continued to pick up gilts issued by the UK’s Debt Management Office. 

This week’s issue of a gilt maturing in 2040 raised £8 billion, offering a coupon of 4.375%. Bloomberg said the order book matched a record set in June and is the biggest-ever demand compared to the size of the sale. 

Demand for gilts under the new government reflects market views that Labour will govern in a fiscally responsible way.