With Trump’s tariff situation rolling on and the 90-day pause having now passed, uncertainty remains rife around the strength of the US economy and implications for economic growth around the world.
Inflation is adding to the uncertainty. And corporate bonds (those issued by companies) are looking expensive compared to government bonds.
Here’s what this could mean for bond investors.
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 US
The economy that has more influence on global markets than any other is in a tough spot.
Inflation came in at 2.7% in June, cementing rises for two months in a row and a longer-term trend of increases since the start of 2025.
No one really knows the impact that tariffs have had on inflation so far, but it’s not potentially very big yet, with some suggesting the impact has been in the region of 0.1-0.2%.
At the same time, economic activity is hard to gauge because of a surge in companies importing goods before the tariff announcement in April, meaning a significant fall in imports in the second quarter.
As the volume of imports is part of the calculation around economic growth, the numbers have been skewed so far this year.
Jobs numbers have been clearer though, with the most recent data about new jobs being created in the US coming in lower than expected (and previous estimates about May and June being reduced too).
On the face of it, not great news.
But given the cuts that have been sought via Elon Musk and the Department of Government Efficiency (DOGE), a lot of this reduction was expected.
That said, the unemployment rate in the US remains low compared to its historic average, which provides a little comfort.
All of this makes setting interest rates a tough job for the Federal Reserve.
Inflation is above target, making them not want to cut rates.
But on the other hand, jobs growth is slowing, suggesting weak economic growth, making them want to cut rates.
So far, they’ve held tight in 2025 (including at their latest meeting on 30 July) and not cut, but if the jobs numbers continue be weak, the chances of them cutting in the second half of the year will be higher.
This could be good for bond prices as bond yields will likely fall if rates do (prices tend to move in the opposite direction to yields).
The UK
The inflation picture is similar here as it is in the US, coming in higher than expected recently at 3.6% in June – the highest level for 18 months.
There’s potential for inflation to continue to tick up over the coming months, before falling back again towards the year end, with energy prices expected to fall later in the year.
The labour market is also weakening in the UK, similarly to the US. The unemployment rate here was 4.7% in May, up from 4.4% at the start of the year.
But one difference to the US is around economic growth, which is notably weaker in the UK. While the data here has also been impacted by business activity before and after tariffs in the US, the overall position is clearer that growth is weak.
This makes the likely trend for interest rates a bit easier to try to predict, because rising unemployment and weak growth gives the Bank of England a clearer path to reducing interest rates.
At the Bank’s latest meeting on 7 August, they did just that, with a cut of 0.25%. Markets continue to price in further cuts over the next 12 months too.
Are corporate bonds expensive?
Compared to the equivalent government bonds, the answer is very much yes.
This is measured by something called the ‘spread’.
The ‘spread’ represents the extra yield available on bonds issued by companies compared to those issued by governments.
Investors receive a higher yield because of the higher probability that a company will default on its bond payments compared to a government.
The smaller the spread, the lower the additional return and hence the more expensive company bonds are relative to government bonds.
This raises the follow-on question of whether to invest in them or not.
This is difficult to answer.
Spreads have been low for a while now, broadly going back to the end of 2023.
Looking at two ends of the bond spectrum since then, the return for the IA Sterling High Yield sector has been 13.75%* compared to -1.15% for the IA UK Gilts sector.
While it’s been relatively expensive to invest in high yield bonds compared to government bonds, the return has been notably higher over this period. Of course, spreads will likely increase again at some point with government bonds outperforming company bonds. But remember that past performance isn’t a guide to the future.
How have bonds performed over the last 12 months?
Performance has been different for different parts of the bond market over the last year, particularly since the start of October.
Higher-risk bonds within the high yield category have provided the highest returns, while UK government bonds have provided the lowest. This is largely because of the yields those bonds offer.
Companies with a higher risk of defaulting on their bond payments have to offer higher returns to investors to take that risk, especially compared to the UK government.
While returns varied within the different sectors, corporate bonds have tended to provide positive returns, while UK government bonds were broadly flat over the last 12 months.
Performance of different bond sectors over the last 12 months
Annual IA sector percentage growth
Jul 20 – Jul 21 | Jul 21 – Jul 22 | Jul 22 – Jul 23 | Jul 23 – Jul 24 | Jul 24 – Jul 25 | |
|---|---|---|---|---|---|
IA £ Corporate Bond | 2.88% | -11.46% | -5.86% | 10.01% | 4.64% |
IA £ High Yield | 10.70% | -8.83% | 4.12% | 10.85% | 8.60% |
IA £ Strategic Bond | 5.53% | -8.95% | -1.67% | 9.35% | 5.86% |
The table above highlights how different the returns can be from different parts of the bond market.
The IA £ Strategic Bond sector returns have been fairly consistently in the middle of the range over time, as you’d expect given funds in that sector can invest in all types of bonds.
This highlights the potential benefits of investing in those funds. While the overall returns might not have been the highest available, the journey hasn’t been as bumpy.
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 9.43%*.
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.
High yield bonds have been the best-performing area of bond markets over the 12-month period, which helped the fund perform better than the wider peer group. The fund tends to only invest a small amount in government bonds. This helped performance as government bonds didn’t perform as well as corporate bonds.
The fund takes charges from capital, which can increase the potential income paid, but reduce the amount of capital growth.
Meet the manager: Artemis High Income
Jul 20 – Jul 21 | Jul 21 – Jul 22 | Jul 22 – Jul 23 | Jul 23 – Jul 24 | Jul 24 – Jul 25 | |
|---|---|---|---|---|---|
Artemis High Income | 13.19% | -8.38% | 3.64% | 12.81% | 9.43% |
IA £ Strategic Bond | 5.53% | -8.95% | -1.67% | 9.35% | 5.86% |
Legal & General All Stocks Gilt Index
The worst-performing Wealth Shortlist fixed income fund over the last 12 months was the Legal & General All Stocks Gilt Index fund, returning -0.42% over the period**.
The fund offers a simple way to invest in UK government bonds across all maturities. It can help diversify a portfolio focused on shares or other types of investment.
The fund takes charges from capital, which can increase the income paid but reduce capital growth. As the fund only invests in UK gilts, it is concentrated at an asset class level. But there also aren’t many gilts so it’s concentrated, and each investment can have a large impact on performance. The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s Prospectus.
Annual percentage growth
Jul 20 – Jul 21 | Jul 21 – Jul 22 | Jul 22 – Jul 23 | Jul 23 – Jul 24 | Jul 24 – Jul 25 | |
|---|---|---|---|---|---|
Legal & General All Stocks Gilt Index | -4.38% | -14.41% | -15.20% | 5.97% | -0.42% |
IA UK Gilts | -4.62% | -14.58% | -15.73% | 5.71% | -0.17% |