More bonds content to help investors amid a changing landscape

interactive investor steps up its content and research on bonds and money market funds to help investors navigate the fixed income market.

interactive investor, the UK’s second-largest investment platform for private investors, is stepping up its content and research on bonds and money market funds, as yields start to look more interesting.

Bond markets, sensitive to high inflation and interest rate hikes, have fallen, meaning that yields have risen. ii wants to ensure there is relevant, engaging and responsible content to guide investors through the often-complicated world of fixed income.

ii’s experienced team of in-house experts is publishing a series of editorial content, as well as specific podcast episodes, infographics and detailed analysis, tailored towards helping investors navigate the fixed income market.

There will also be entry-level content, including a beginner’s guide to bond funds and bonds (corporate and government), why they might be worth considering, which bonds are the least and most risky, what is a gilt, and much more.

Lee Wild, Head of Equity Strategy, interactive investor, says: “The world has changed. On expectation of more aggressive monetary policy tightening by central banks around the world, the bond markets are experiencing a sell-off which shows no sign of slowing. There looks to be more economic pain on the horizon, and ii wants to make sure private investors have all the tools in their arsenal to help them weather the turbulence.

“It’s an ideal time to launch this project. As rates rise, we are conscious that people will be wanting a decent return for their cash. There’s also the possibility that some people might prefer the greater safety of bonds and money market instruments – especially as they can offer higher yields than traditional savings accounts. But good research is crucial.

“We have always covered the bond market, but we want to make sure we are continually upping our game and providing the most relevant content for our customers, in a responsible, educational way. Bonds can be complicated, and while our research will be broad, we continue to believe that they are often best accessed through professionally managed funds. We recommend several bond funds on our rated lists - Super 60 and ACE 40.”

To kick the project off, Sam Benstead, Deputy Collectives Editor, and Kyle Caldwell, Collectives Specialist, share their thoughts on the bond market, and interpret the current market sell-off:

Why have investors been dumping bonds?

Sam Benstead, Deputy Collectives Editor, interactive investor, says: “Bond investors are worriers – they want to make sure that they get paid back when they buy the debt of companies or governments and that their income is not destroyed by inflation. On the other hand, stock investors concentrate on the ‘upside’ – predicting how much a company could grow in the future. This means that the bond market is hypersensitive to changes in the economic outlook. And boy is it worried at the moment.”

Not the time to bin bonds: the macro environment is difficult for bonds but they shouldn’t be written off

Kyle Caldwell, Collectives Specialist, interactive investor, says: “Bonds are more complicated and less exciting than equities, but they should not be written off, even in the current challenging environment for the asset class.

“Through this project, we want to help investors navigate the fixed income market with confidence.

“As with any investment, ultimately it will depend on the investor, but we have seen that over the long-term the diversification benefits of holding bonds alongside equities has helped cushion investors from sharp stock market falls.”

How can investors interpret the current bond market sell off? 

Sam Benstead, Deputy Collectives Editor, explains: “Weighing up rising interest rates, slowing economic growth, and high inflation – we currently have somewhat of a perfect storm for fixed income.

“Yields, which move inversely to price, have therefore shot up. US government bonds with a 10-year maturity now yield around 3%, nearly five times higher than their low point. In the UK, 10-year gilts are around 2%, 20 times higher than their low point.  

“Corporate bond yields, and how much they return over the ‘safe’ government bond rate, known as the spread, have also shot up. Investors can now get nearly 4.5% annual income from the safest corporate credit, known as investment grade, while high-yield or ‘junk’ bonds yield around double that. 

“This means that bond prices have fallen in tandem with stock prices this year, rather than providing a protective buffer in difficult markets. For UK investors, this has meant around an 11% drop this year in the value of the typical bond fund. 

“Investors should interpret the bond market sell-off as a warning sign that economic pain is around the corner. This means higher inflation for longer, more defaults on the debt of companies, and higher interest rates, which will put the brakes on economic growth. 

“It is hard to say if this means a recession, or how deep an economic downturn might be, or exactly what inflation will peak at. But it does tell us that the most sophisticated investors are predicting bad news and are not confident that central banks will get a grip on inflation without hurting the economy.  

“However, the intensity of the bond market sell-off, even before interest rates have risen much, means that there could now be some value there for investors.  

“If inflation comes down next year, as it is likely to due to commodity prices stabilising or falling, then locking in a 4.5% yield from a safe company bond may look like savvy move, but good research is key.”