Autus Newsletter » Winter 2022
Bonds come in from the cold
As interest rates tick up, those seeking an income from their investments may want to look
at their options again.
Interest rates have remained at historically low levels for more than a decade, with UK base rates below 1% from March 2009 to May 2022. Since then, however, rates have increased four times and stood at 3% at the start of November.
This has had a knock-on impact on fixed-income investments, with yields now rising.
Corporate bonds and gilts are debt issued by companies or the UK government respectively. They generally pay a level income, known as a ‘coupon’ over a fixed term, with capital returned at the end of this period.
These investments can look less attractive as interest rates rise, as the fixed income paid may be a smaller margin over what investors can get from ‘risk-free’ deposit accounts.
But we have been living through unusual economic times. Sustained ultra-low interest rates have led to negligible returns on deposit accounts. Demand for bonds and gilts increased significantly, and institutional investors were forced to step up the risk to generate returns on their money, leading to inflated market prices.
With higher interest rates the reverse is now happening. Demand has fallen, dampening prices. Lower prices and higher yields mean bonds may now look a more attractive option for income-seeking investors, particularly those that don’t want the risks of equity markets.
As ever, expert advice is the first port of call.
Interest rates have remained at historically low levels for more than a decade, with UK base rates below 1% from March 2009 to May 2022. Since then, however, rates have increased four times and stood at 3% at the start of November.
This has had a knock-on impact on fixed-income investments, with yields now rising.
Corporate bonds and gilts are debt issued by companies or the UK government respectively. They generally pay a level income, known as a ‘coupon’ over a fixed term, with capital returned at the end of this period.
These investments can look less attractive as interest rates rise, as the fixed income paid may be a smaller margin over what investors can get from ‘risk-free’ deposit accounts.
But we have been living through unusual economic times. Sustained ultra-low interest rates have led to negligible returns on deposit accounts. Demand for bonds and gilts increased significantly, and institutional investors were forced to step up the risk to generate returns on their money, leading to inflated market prices.
With higher interest rates the reverse is now happening. Demand has fallen, dampening prices. Lower prices and higher yields mean bonds may now look a more attractive option for income-seeking investors, particularly those that don’t want the risks of equity markets.
Funds offer risk reduction
Most retail investors don’t buy individual bonds or gilts but invest via a fund which buys a broad spread of bonds. This means if one defaults its impact should be minimal on overall returns.As ever, expert advice is the first port of call.
* The value of your investment and the income from it 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.
Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.