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Bond Watch: why February ended on a high for bonds

Sam Benstead breaks down the latest news affecting bond investors.

1st March 2024 11:27

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.        

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Here’s what you need to know this week.  

Falling US inflation welcomed by markets 

A measure for US inflation for January came in at just 2.4%, which boosted bond prices.  

The PCE inflation figures – or core personal consumption index – which strips out volatile items such as food and energy prices was at its lowest level since February 2021. The US central bank considers it a better measure of inflation than the headline consumer price index as it is less influenced by commodity prices.  

The fall from 2.6% in December suggests that expectations that interest rates will be cut around the middle of the year will hold true.  

US bond yields fell – a result of rising prices – in the wake of the news. The US 10-year government bond yield dropped from 4.35% to 4.25%. However, UK bond yields were unchanged.  

Nevertheless, Deutsche Bank strategist Jim Reid said the figure showed that inflation was still running above target.  

“So for now the market is relaxed, but inflation is proving a little sticky as we start the year. Perhaps the sanguine response is based on the fact that pretty much nobody now expects a March interest rate cut and a lot of water can flow under the bridge before June when the market expects the first one. So, plenty of time for a change of mind on things or for the data to change.” 

How did bonds perform in February? 

Bonds registered negative returns in February, as investors pushed out their forecasts for when central banks would cut interest rates. 

According to Deutsche Bank, US Treasuries dropped 1.4%, European government bonds dropped 1.2% and gilts fell 1.3%. 

On a total return basis, sterling corporate bond funds fell on average 0.5%, with income from coupons counterbalancing falling bond prices.  

Reflecting the fall in bond prices, the 10-year UK gilt, considered a benchmark for UK government borrowing costs, rose from 3.75% to 4.2%. 

Bond yields rise when prices fall, as investors are paying less for a fixed income, meaning that their future return is greater.  

Year to date, gilt funds have dropped 4% on average and sterling corporate bond funds are down just under 2%.  

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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