Interactive Investor

Bond Watch: markets rally despite 'worrying' US inflation data

Sam Benstead breaks down the latest news affecting bond investors.

17th May 2024 09:00

by Sam Benstead from interactive investor

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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.                

US inflation falls to 3.4% 

US inflation fell more than expected in April, causing stock and bond markets to rally.  

Its consumer price index (CPI) increased 3.4% for the year, compared with a 3.5% annual increase in February.  

Bond yields fell as a result, with the US government 10-year bond yield dropping from 4.5% to 4.3%. US and UK stocks markets hit all-time highs this week.  

However, Tiffany Wilding, an economist at fixed income investor PIMCO, warned that investors should not be cheering too loudly. 

Wilding says that although markets appeared relieved that CPI did not show a larger than expected increase as it did in March, the data was still worrying as the US central bank will need to see a sharper and more sustained inflation deceleration before it cuts rates. 

She concludes: “The data does not change our expectations that the Federal Reserve will delay rate cuts until it sees more sustained deceleration in inflation, which means in 2024 there’s a possibility that policymakers keep rates on hold.” 

In contrast, UK inflation is expected to fall sharply when April data is released next week. Deutsche Bank predicts it will be 2.2%, just ahead of the Bank of England’s 2% target.  

It expects it to sit between 2% and 2.5% for the rest of 2024 and then settle around 2% in 2025.  

Four gilts investors are backing 

On the ii platform, 42% of gilt investments are invested in just one gilt. The three most-popular gilts have collected 55% of the gilt assets. There is then a long tail of gilts with cash in.    

The most popular by quite a margin is TN25.    

The next most-popular bond is T26. Like TN25, it has a very low coupon, at just 12.5p per £100 bond, because it was issued in May 2020, when interest rates were near zero and investors were worried about the economy after Covid hit.    

Another popular gilt is TR25. It has a £5 annual coupon, indicating that it yielded around 5% when it was issued in December 2024.  

Finally, TG61, a “long” bond with a high sensitivity to interest rates, is also popular. 

Read more about why investors own these gilts here.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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