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.
Record wage growth puts pressure on bank of England
Average earnings (including bonuses) in the UK rose 8.5% in the three months to July compared with the same period last year, the biggest jump in the 20 years that the Office for National Statistics (ONS) has been collecting the data.
The hot labour market puts pressure on the Bank of England (BoE) to take further measures to cool inflation, as rising incomes could lead to more sticky and bigger price rises.
The next rate decision is due next week, on 21 September, with a 0.25 percentage point rise to 5.5% expected, but a 0.5 point rise possible as well. Governor Andrew Bailey has said that the peak in interest rates is near, but wage growth may cause him to change path and take rates even higher than forecast.
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Hugh Gimber, global market strategist at JP Morgan Asset Management, says recent commentary from Bank of England officials points to a committee that is increasingly wary about the risk of overtightening.
“The problem so far, however, is that the signals coming from the labour market have simply been too strong to justify a pause in rate rises,” he said.
Gimber adds that annual wage growth at 8.5% will be a major source of concern for the BoE, even discounting for the impact of one-off CIvil Service payments that tilted the numbers higher.
“The bank will be reluctant to keep tightening if they’ve watched other central banks around the world hit pause. Yet if incoming data doesn’t turn definitively, another hike to a terminal rate of 5.75% is absolutely on the table,” Gimber said.
Nearly all bond investors lose money over three years
Rising interest rates have punished sterling bond investors so badly that only a handful of funds have made money over the past three years.
Research from FE Analytics, a fund data provider, found that in the Investment Association (IA) Sterling Corporate Bond sector just one of the 96 funds with a three-year record posted a positive return: M&G Short Dated Corporate Bond, which was up 3.2%.
In the IA UK Index Linked Gilts, the average loss among the 17 portfolios we looked at was 34.5%, with the worst fund (Fidelity Index Linked Bond) falling 38.6% and the best one (Scottish Widows UK Index Linked Tracker) losing 29%. No UK Gilts fund made money either.
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IA Sterling High Yield did much better, with around one-third of members down over three years.
When interest rates rise, investors sell existing bonds as newly issued debt will come with higher yields, meaning that yields on similar bonds converge around the current market rate.
Bond yields are simply a result of the price of the bond and the coupon it pays. Rising prices lead to lower yields as investors are paying more for a fixed-income stream, while lower prices leads to higher yields as investors are paying less for a fixed-income stream.
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.
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