How investors are tapping into high bond yields

The preferred way among fund investors of accessing the bond market in November last year was to buy gilts, as higher yields and a more positive inflation outlook attracted investors to UK government debt.

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The latest figures from the funds trade body the Investment Association (IA) showed that net £548 million flowed into gilt funds in November 2023.

Fixed-income funds in total saw net inflows of £366 million, with high yield bond funds also proving popular with net retail sales of £190 million.  

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Bonds are back on the map for investors following a steep sell-off in 2022 and the first half of 2023 as interest rates rose.

But falling bond prices results in higher yields, and now investors are paid a yield-to-maturity of around 4% from gilts, 5.5% from sterling investment grade bonds and around 9% from sterling high-yield bonds.

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Investors are also optimistic on the outlook for bond prices as inflation falls, which gives central banks more scope to cut interest rates.

Overall, the IA found that UK savers put £1.1 billion into funds in November 2023. Equity funds experienced strong inflows of £991 million, an increase from October’s £488 outflows.

The most-popular equity region was North America funds, which saw inflows of £115 million, followed by Japan funds, which experienced inflows of £47 million.

Europe funds saw outflows of £305 million and global funds saw net outflows of £314 million. 

Responsible Investment funds remained in the red, with outflows of £459 million, down from last month’s £544 million outflow. Money Market saw outflows of £319 million as investors decided to add money to equity and bond markets.

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Tracker funds saw inflows of £2.7 billion, the highest inflow since April 2021, with low fees and in many cases strong performance relative to active managers tempting investors.

Chris Cummings, chief executive of the IA, said: “In November 2023, we saw savers return to put money into funds, as most asset classes bounced back after a challenging third quarter of the year.

“With inflation easing, there is a glimmer of hope on the horizon that we may see less restrictive monetary policy and cuts in central bank rates in 2024. The latest flow data suggests this has boosted both consumer confidence and wider market sentiment.”