Interest rate rises seem to have stopped. Rates in the UK, US and Europe are likely to be at their peak and as a result, government bond yields have been falling since the end of October 2023.
Here’s why and what it could mean for bonds.
This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. All investments and any income from them can fall as well as rise in value, so you could get back less than you invest. Yields are variable and not a reliable indicator of future income. Past performance also isn’t a guide to the future.
The great bond market pivot of 2023
It’s finally happened – bond investors have decided. As far as they’re concerned, the interest rate rising cycle has finished and interest rate cuts are coming.
If you believe what markets are saying then at the time of writing, 2024 will be a year of interest rate cuts, totalling 1.25% in the US. And it’s likely that other developed market central banks will follow the US, to differing degrees.
This is being called the central bank ‘pivot’, signalling the significant shift in monetary policy from increasing rates to decreasing them. Bond markets effectively made the call that the pivot was happening at the end of October 2023.
This policy change might not look huge for day-to-day life – if interest rates go from 5.25% to 4.5%, anyone with a mortgage will be better off, but everyone else won’t see a big impact on their monthly cashflows.
For bonds though, it’s significant.
It’s significant because interest rate rises are bad for bond prices, so if no more increases are likely, it’s good for prices. At the same time, anticipation of interest rate cuts is also good, because it will increase bond prices.
That said, just because bond investors think rate rises have stopped, doesn’t mean that they definitely have and rate cuts aren’t ever guaranteed.
The 12-month performance graph for some key bond sectors shows this shift in sentiment.
Jan 19 – Jan 20 | Jan 20 – Jan 21 | Jan 21 – Jan 22 | Jan 22 – Jan 23 | Jan 23 – Jan 24 | |
|---|---|---|---|---|---|
IA £ Corporate Bond | 10.37% | 4.44% | -3.51% | -11.19% | 4.33% |
IA £ High Yield | 8.66% | 3.60% | 2.21% | -5.53% | 8.27% |
IA £ Strategic Bond | 8.89% | 4.51% | -0.49% | -7.63% | 4.88% |
IA UK Gilt | 9.82% | 2.92% | -6.81% | -19.59% | -1.71% |
The rally over November and December was pretty exceptional. The IA £ Strategic Bond sector’s average 12-month return over the last 20 years has been 4.43%. In November and December 2023 alone, it returned 7.50%.
That said, since new year, bonds have generally given back some of those gains. This isn’t a huge surprise given the strength of the rally.
Remember though, these time periods are very short, and as we’ve been saying for a while now, short-term volatility should be expected.
What are central banks saying?
US interest rates stayed the same after the Federal Reserve’s latest meeting on 30 January 2024. Their comments on future plans stayed firm, stating interest rates are likely to stay at these levels to keep cooling inflation. Although they do expect to have made some interest rate cuts by the end of 2024.
The Bank of England last met on 1 February and did and said the same thing. Just like the European Central Bank on 25 January.
This does raise the question whether bond markets have got a bit ahead of themselves. This is hard to answer and only time will really tell. But the pull back in prices we’ve seen in January reflects some agreement by bond investors that maybe their joy had gone too far at the end of 2023.
How have our fixed income Wealth Shortlist funds performed?
Our Wealth Shortlist bond funds have delivered mixed performance over the past year. Some have outperformed their peer group, while others have underperformed.
We wouldn’t expect them all to perform the same though. If all your funds in a sector are performing well at the same time, they're probably investing in similar areas.
Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.
For more details on each fund and its risks including charges, see the links to their factsheets and key investor information below.
Artemis High Income
The best performing Wealth Shortlist fixed income fund over the past year was Artemis High Income with a return of 7.21%*.
The fund focuses on paying a high income to investors, mainly by investing in bonds. But it can also invest up to a fifth of its assets in UK and European shares.
A focus on high-yield bonds and investments in shares that pay a dividend makes it a little different from most bond funds, though it does make it a higher-risk option.
The focus on high-yield bonds has been positive over the last 12 months, with that area of the fixed interest market having performed best over the period.
The fund has the option to use derivatives, which adds risk.
Jan 19-Jan 20 | Jan 20 – Jan 21 | Jan 21 – Jan 22 | Jan 22 – Jan 23 | Jan 23 – Jan 24 | |
|---|---|---|---|---|---|
Artemis High Income | 8.69% | 1.33% | 4.21% | -4.94% | 7.21% |
IA £ Strategic Bond | 8.89% | 4.51% | -0.49% | -7.63% | 4.88% |
M&G Global Macro Bond Fund
The worst-performing Wealth Shortlist fixed income fund over the last 12 months was the M&G Global Macro Bond Fund, returning -4.20% over the period**.
Jim Leaviss and Eva Sun-Wai start with a 'bigger picture' macroeconomic outlook. This includes forming a view on economic growth, interest rates and inflation globally. This helps them decide how much to invest in different areas of the bond market and different currencies.
Leaviss has historically used the flexibility afforded to him in the fund to good effect to deliver strong returns for investors. We believe experience is vital for a manager of this type of fund and Leaviss is one of the most experienced bond fund managers in the UK.
The biggest cause of the negative returns over the period has been the fund’s exposure to the US dollar and Japanese Yen. Both have fallen in value compared to pound sterling and have had a notable impact on overall fund performance.
Jan 19-Jan 20 | Jan 20 – Jan 21 | Jan 21 – Jan 22 | Jan 22 – Jan 23 | Jan 23 – Jan 24 | |
|---|---|---|---|---|---|
M&G Global Macro Bond Fund | 5.85% | 6.29% | -3.57% | -1.35% | -4.20% |
IA Global Mixed Bond | 6.23% | 3.81% | -2.74% | -5.72% | 2.25% |