The UK’s cost of living crisis means that recession fears, combined with a focus by the BoE on raising interest rates, have hit the UK fixed income market hard.
At Aviva, using all of the tools at our disposal in our bond armoury has been important here. More specifically, investing in short-dated bonds has enabled us to reduce duration and therefore our exposure to the worst-performing parts of the UK bond market.
In the first half of 2022, the ICE BofA Sterling Non Gilts Index declined 12.41 per cent, while the FTSE Actuaries UK Conventional Gilts All Stocks Index declined 13.90 per cent.
In comparison, the ICE BofA Sterling Non Gilts 1-5 Year Index declined 4.88 per cent, while the FTSE Actuaries UK Conventional Gilts Index declined 2.18 per cent in the first half of 2022.
Similarly, using tactical asset allocation at a regional level to avoid US government bonds, where the tightening cycle has been more aggressive, has also helped.
While it’s been a painful time for fixed income in the short term, we believe that the re-pricing in bonds that we have seen since the start of 2022, provides a more attractive case for income in the longer term, and one that we have not seen in a long time.
UK government bonds have drawn a lot of criticism for not providing yield-starved investors with an adequate level of income over the past decade, given the record-low interest rate environment and quantitative easing programme in place since 2009.
An increase in bond yields is also positive for corporate bonds. Strong research in the credit space to identify the best quality and attractively valued corporate bonds will be well rewarded here.
While there may potentially be more volatility in bond markets in the near term, we believe strongly that the case for strategically owning bonds over the longer term remains.
Government and corporate bonds have a role to play in managing inflation and duration risk, which is not possible through cash alone, and also where risk-aware investment strategies are used to take customers through their retirement journey.
Looking ahead, we believe holding both equities and bonds will provide our customers with the benefits of diversification.
Helen Delaney is investment proposition manager at Aviva Wealth
