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Bond investors seek a refuge

Tough questions are back for 'safe' bonds
Bond investors seek a refuge

With the inflation narrative continuing to gather momentum, life has looked pretty hairy for bond investors. As we moved into the first full week of October the yield on a 10-year UK gilt hit its highest level since spring 2019 on the back of soaring gas prices. This followed a month in which resurgent inflation worries had already dealt a blow to government bonds elsewhere: US Treasuries have also seen yields spike and the FT reported a dismal September for conventional 60/40 portfolios as stocks and bonds fell in tandem – a worrying development for assets that are meant to have little or no positive correlation.

With fixed-income markets having shrugged off inflation concerns earlier this year and some prominent bond fund managers once appearing adamant that price rises should prove transitory, this represents a change in tone. Inflationary signals seem to be enduring and central banks appear more open to the idea of raising rates in the future, putting the asset class once again under pressure.

We’ve noted before that government bonds are often portrayed as a bubble waiting to burst, although they have continued to rise in price despite such predictions. As Laith Khalaf, head of investment analysis at AJ Bell, recently noted, it was back in 2010 that renowned fixed-income investor Bill Gross declared that UK gilts were sitting on a “bed of nitro-glycerine”. If Gross was early in this call, the subsequent gains in gilt prices now mean valuations have much further to fall. Khalaf notes that a 10-year gilt offered a yield of 4 per cent back when Gross made his remark: around a decade of strong performance later, it sat at roughly 1.1 per cent even in the wake of the most recent sell-off.

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