Sam Benstead breaks down the latest news affecting bond investors.
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.
UK inflation is still above 10%
Prices in the UK rose 10.1% in the year to March, despite expectations that the closely watched Consumer Prices Index (CPI) figure would fall below 10%.
While dropping from the 10.4% February figure, economists thought price rises would drop to 9.8% last month.
The bad news will ramp up pressure on the Bank of England, which is struggling to contain inflation despite pushing interest rates up to 4.25%.
Markets now see 5% interest rates as the most likely outcome, with three more rate rises due before September in a bid to cool down the economy.
Food price inflation was particularly high in March, with prices rising 19.1%, while fuel costs fell.
Charles Hepworth, investment director at GAM Investments, said: “This will be an uncomfortable inflation print for the Bank of England, with Governor Andrew Bailey recently intimating that a pause to the hiking cycle would be warranted if inflation was seen to be subduing.
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“Surging imported food costs were a key driver of persistently higher than comfortable inflation costs in March.”
Hepworth adds that there are real dangers of a “wage price spiral”, where higher wages lead to still higher prices.
“Another quarter point hike is warranted at next month’s Bank of England meeting and possibly further additional hikes further out. The Bank needs to take back control, because at the moment it is falling woefully short,” he said.
However, there were signs this week that the UK economy is beginning to slow down. Retail sales data, which measures the amount of goods sold in shops and online UK retail sales, fell 0.9% in March as consumers felt the impact of rising prices.
Emma Mogford, fund manager at Premier Miton Investors, said: “Inflation continued to eat into the UK’s consumer spending, notably even volumes at food stores went down. The consumer is likely worried too that when the full impact of rate hikes is felt later this year, there could be an increase in unemployment."
What will bond markets return?
BlackRock, the world’s largest asset manager, publishes forecasts for expected returns from different parts of the bond market. Its estimates factor in interest rates and the yield on offer from bonds today.
The fund manager thinks that, over 20 years, global high-yield bonds will deliver the best returns, at 5.7% a year. High-yield bonds, as their name suggest, offer investors high yields but come with greater risk. Over long periods, so long as investors are willing to withstand more volatility, they are generally rewarded.
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UK corporate bonds of all maturities are expected to return 4.8% a year for the next 20 years, and around 5% for the next five, 10 and 15 years, while UK government bonds are expected to return around 4% a year in the long run.
Generating around 5% a year in returns from the bond market is a marked changed from just two years ago, when yields were close to zero from the safest government bonds. However, inflation is now higher, so real (inflation-adjusted) returns could be far lower.
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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