Bond Watch: what do steady rates mean for bond investors?

The British and American central banks did not change interest rates this week, opting to keep them at 4.25% and a 4.25% to 4.5% range respectively.

In the UK, six of the nine rate setters voted to hold, while three preferred a 0.25 percentage point cut.

This was largely expected by markets, meaning that the reaction from bonds was muted. The 10-year gilt now yields 4.5% and the 10-year US Treasury bond yields 4.275%.

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Fund manager Schroders noted that the tone of the Bank of England meeting was similar to last month's, even if the vote split skewed slightly dovish relative to consensus.

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Their fixed-income strategist Marcus Jennings said: “Market expectations were low for this Bank of England meeting and in the event, it proved to be one of the less volatile moments for the gilt market. The Bank of England has recently reiterated a gradual approach to rate cuts and the macro developments since the last meeting have broadly played into this view.”

UK inflation figures this week came in lower than expected, at 3.4%, but not low enough to seriously consider cutting interest rates.

Myron Jobson, interactive investor’s senior personal finance analyst,  said: “Transport costs helped to bring down inflation slightly last month, but this was offset by rising food and furniture prices. Looking beyond the headline figure, core inflation - which strips out volatile food and fuel costs to provide a clearer sense of the underlying trend - eased as expected.”

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So, where does this leave bond investors? With inflation stubbornly high and uncertainty around the level and impact of tariffs, as well as conflict in the Middle East and its potential to increase oil prices, the UK and US central banks are reluctant to cut interest rates.

This means that bond investors are unlikely to see a big capital uplift to their positions, but they can take advantage of high yields versus bonds from other countries and pick up a secure income.

However, if economies began to weaken and inflation falls, interest rates may come down faster too.

One sign of economic weakening in the UK is a fall in retail sales volume of 2.7% in May, following a rise of 1.3% in April. This is a measure of consumer spending showing that people are feeling the pinch and spending less money, indicating a weakening economy.