Now is the most attractive entry point to the bond market “in a lifetime”, investment advisers have said, as yields push record highs.
Bonds have moved back in favour recently, especially for new investors, and the outlook for the economy means that investing in fixed income today could prove fruitful for investors.
“With bond yields close to record highs and inflation finally receding, if interest rates soon take a downward trajectory, this could present the most attractive entry point for bonds I’ve seen in my lifetime,” said Tim Morris, from Russell and Co Financial Advisers.
Philip Dragoumis, director at Thera Wealth Management, agreed. He told FT Adviser: “Government bonds have not been trading this attractively for over 15 years. Inflation is coming down and bond yields are giving you a guaranteed return, if held to maturity, over and above the expected inflation rate.”
He added that if things went “completely pear-shaped” in the global economy, bond prices would soar. "If this doesn't happen, you are being paid handsomely to wait to find out", he said.
The bond market appears attractive at the moment because yields are high, but economic indicators suggest they may not move much higher.
Investors can get about 4.5 per cent on a UK government 10-year gilt, compared to the 0.2 per cent that was on offer during the pandemic, for instance.
If interest rates were to move higher, the yield offered on your bond would be lower than the market rate (and so the price will fall, pushing up the yield to match the new, higher rate).
The Bank of England’s base rate reached 5.25 per cent in August, but the monetary policy committee has held it at this rate since.
The US’s central bank, the Federal Reserve, has also held its rate target at a 22-year high of 5.25 to 5.5 per cent.
Inflation also measured 4.6 per cent in the year to October, which was lower than expected, in a sign that central banks will not need to move rates any higher.
Cautious tone
Investing in bonds now is not without risk, however.
Paul Pasteur, global fixed income portfolio manager at Payden and Rygel, said there were three things that had surprised bond markets this year.
These are: inflation, which has been stickier than expected; growth, which has been better than expected; and the growing supply of government bonds, which had led supply and demand imbalances in the bond market.
He said: “All three have contributed to yields moving higher, to levels that we haven’t seen since the great financial crisis.
“While yields are attractive, it’s good to think about these drivers. Monetary policies and concerns around supply and demand are less likely to exert upwards pressure on yields, but growth could continue to push yields higher if it remains resilient.
