Last year was tough for bond investors.
Despite repeated assertions from the Bank of England (BoE), UK inflation proved far from “transitory”. The Office for National Statistics (ONS) confirms that the Consumer Prices Index (CPI) rose to an October 2022 peak of 11.1% and was still in double figures by the end of the year.
In turn, high inflation has led to 14 consecutive increases to the BoE base rate, pushing interest rates to levels not since before the 2008 financial crisis.
These forces combined to push bond yields sharply higher, and – because price and yield are inversely related – the price of bonds went down.
So what can we learn from 2022, and what might the rest of the year hold for bonds and investors?
Keep reading to find out.
Bonds are generally considered safe investments
A bond is effectively a loan you make to a bond issuer, like a company or government. In the UK, government bonds are known as “gilts”.
You earn interest on the bond, providing a reliable income, and then receive the face value of the bond upon maturity.
The price of a bond varies, with the bond yield representing the amount you receive as a percentage of the bond’s current price. If the price of a bond falls, yields rise, and vice versa.
The bond market is worth around £93 trillion.
In October 2022, City AM reported that more than £1.3 trillion had been wiped off the value of UK bonds, with gilts dropping by around 26%.
Bond performance was poor on a global scale, but Britain fared particularly badly. Several factors led to this, which according to the Guardian, included:
- The unfunded tax cuts announced in the government’s September 2022 mini-Budget
- Higher inflation than elsewhere (for example in the US and Eurozone)
- A lack of investor confidence in the BoE’s response to rising inflation.
The losses suffered by gilts (26%), index-linked gilts (36%), and corporate bonds in the first three quarters of 2022 alone were large, especially for an asset classed traditionally thought of as low risk. But will 2022 prove to be an anomaly?
2022 was a bad year for bonds but the signs are better for 2023/24
FTAdviser reports that for the first half of 2023, the gilt index recorded a loss of 3.8%. Clearly, this isn’t good news if you hold bonds, but it does represent a vast improvement compared to 2022.
As they have done over the last 18 months or so, inflation and interest rates will continue to play a major role in the bond market in the second half of 2023 and into 2024.
Inflation has fallen sharply in recent months, though the BoE doesn’t expect it to reach its own 2% target until at least April 2025. Meanwhile, the central bank’s Monetary Policy Committee (MPC) is expected to raise the base rate again when it meets next on 21 September.
The Guardian reports that financial experts forecast a base rate rise, though they expect 5.5% to mark the peak.
The importance of diversification, patience, and the long-term view
Bonds are only one of the asset classes that comprise your investment portfolio.
Your investment strategy is based on your risk profile, capacity for loss, and time frame, and aligned to your long-term goals.
We manage risk in your portfolio through careful asset allocation and diversification. That means spreading your investment between different asset classes (including bonds), across different sectors, and geographical regions.
While the last few years have been tough for the UK economy, your investments are long-term exactly to ride out periods of short-term volatility. That means that if your goals haven’t changed, then it is unlikely that your strategy will need to.
Remaining focused on the long term, staying patient, and ignoring the noise of market fluctuations are key to your ultimate success.
If you want to discuss your asset allocation or any other aspect of your financial plan, or you just want reassurance, get in touch now.
Get in touch
If you’re worried about the role of bonds in your investment portfolio, or any other aspect of your long-term financial plans, we can help. Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
