Bond Watch: have we hit peak rates? And new bond offers 11.5%

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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Here’s what you need to know this week.  

UK inflation drops to 6.7% leading the Bank of England to hold rates

Headline consumer price index (CPI) inflation in the UK dropped from 6.8% to 6.7%, wrong-footing economists who predicted that a higher oil price would feed through to a slight increase in the August inflation rate.

A lower-than-expected inflation print puts less pressure on the Bank of England (BoE) to increase interest rates.

While a lower-than-expected inflation print puts less pressure on the BoE to increase interest rates, it was still expected that rates would rise this month by 0.25% percentage points.

However, in a surprise move, the Bank of England opted to keep rates on hold at 5.25%. It was a very close call, with a 5 to 4 split among the members of the rate-setting Monetary Policy Committee (MPC). Five members voted for a pause, while four voted for a rise.

• Bank of England holds rates at 5.25% after inflation surprise
• Benstead on Bonds: why UK investors are getting a great deal on bonds 
• Benstead on Bonds: time for equal access to fixed income?
• Don’t expect UK interest rates to fall in 2024

The 10-year government bond yield barely moved following the pause, remaining at around 4.3%.

There’s a growing consensus among fund managers that interest rates have now peaked.

David Zahn, head of European fixed income at Franklin Templeton, said unless inflation doesn’t continue to decline “we may have seen the last interest rate hike from the BoE in this cycle”.

He added: “Economic data continues softening and inflation is declining and should continue into next year. Gilts look at attractive levels with the BoE on hold.”

Fredrik Repton, senior portfolio manager at Neuberger Berman, is also of the view that this “may have been the final hike” because “the UK economy is slowing and inflationary pressures are subsiding slowly”.

New bond offers investors 11.5%

A new bond is being sold to retail investors, paying a 11.5% annual yield (paid twice a year on 3 April and 3 October) and maturing in three years. It includes a partial 20% guarantee if the bond defaults on the interest payments or principal payment.

The retail bond is being issued by LendInvest, a company which offers short-term, buy-to-let and homeowner mortgages. Interactive investor is an authorised broker for the bond, which has a minimum initial subscription amount of £1,000 and is available in multiples of £100 thereafter.

The offer period is expected to close at 4pm on 27 September 2023.

• Everything you need to know about investing in gilts
• Day in the life of a bond fund manager: M&G’s Eva Sun-Wai

However, investors should tread carefully and make sure they understand the risks attached to this bond. Yielding 11.5%, which is about double the rate on sterling investment grade corporate bonds, suggests that it is risky.

Risks flagged in the bond’s prospectus, which should be read by investors before they commit any money, include a slowdown in the property market and the risk that the 20% guarantee will not be honoured if LendInvest does not have the resources to pay out.

The bond is also “unsecured”, meaning that it is lower down the pecking order than “secured” bonds if the company goes into liquidation.

Why UK investors are getting a great deal on bonds

I wrote this month’s Benstead on Bonds column on the high yields available in sterling compared with other developed world currencies.

Owning debt in your own currency is beneficial because investors do not have to worry about currency fluctuations, nor pay extra fees for fund managers to hedge out the impact of these currency fluctuations.

This means talk of the return on bonds has an even more important meaning for UK-based investors, particularly those who are comfortable buying bonds directly, such as gilts and corporate bonds.

Read the full column here for insights on why sterling investors are getting a higher yield, but why these high yields also come with a cost attached.