Interactive Investor

Bond Watch: why bond yields are still rising (and prices falling)

Sam Benstead breaks down the latest news affecting bond investors.

18th August 2023 09:55

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. 

Here’s what you need to know this week. 

Strong economies but pressure on bonds 

Despite signs that inflation is returning to central bank targets, bond yields continue to rise as a result of bond prices falling.  

Bloomberg reported that global government bond yields extended their climb to the highest levels since the 2007-08 financial crisis, as strong economic data suggests that interest rates will be higher for longer.  

The yield on the Bloomberg Global Aggregate benchmark for global bonds is now around 4%. The index owns the debt of large companies and governments, and has around 20% invested in US government treasury bonds. 

Strong wage data out of the UK this week, alongside sticky core inflation stats, suggest that the economy will run hot for longer than analysts anticipated. As the rate-hiking cycle began, economists generally predicted that higher rates would slow down economies, and lead to recessions that would dampen price rises.  

Over the past month, the yield on the 10-year gilt has risen from 4.2% to 4.7%.  

The American economy is also extremely healthy with unemployment around 3.5% and 2.4% real GDP growth for the year to July 2023.  

US 10-year bond yields have moved from 3.8% to 4.3% over the past month.  

UK inflation falls – but don’t celebrate just yet 

Inflation figures this week in Britain showed that while headline inflation continued to fall, there is not much room for the Bank of England to be complacent as core inflation was unchanged.  

CPI inflation came in at 6.8% for the year to July, which was above the 6.7% that economists had forecasted.   

However, core inflation, which excludes volatile food and energy prices, was stuck at 6.9% and service prices increased at an annual rate of 7.4%, compared with 7.2% in June.  

Markets now point to rates peaking at about 6%, and economists think they will not be cut before mid-2024.  

Wage data this week also showed that inflation could become embedded, with private sector salaries, excluding bonuses, rising 7.8% on an annual basis for the three months to June. 

In response to the hot economy, investors sold bonds. Current gilt yields are over 5% for bonds maturing in one and two years, while five and 10-year bonds pay 4.75%. Longer-duration bond yields are creeping up as investors bet that interest rates and inflation will be higher for longer. Just a month ago the 10-year bond yielded 4.2%. 

The latest economic data suggests that a 0.25 percentage point rate increase from the Bank of England is likely in September, and a 0.5 increase is also possible.  

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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