Fixed Income  

Inflation stalking the fixed income sector

  • To be reminded about the impact of inflation on interest rates
  • To learn about impact of interest rates on bonds
  • To learn what the long-term outlook might be
CPD
Approx.30min
Inflation stalking the fixed income sector

Introduction

Fixed income is a regular feature in many an investor's portfolio, as a measure to counteract the volatility of equities. But this is not failsafe, as sometimes equities and other asset classes can be positively correlated. But one of the worst things to happen to bonds is inflation, and the expected corollary, interest rates. If interest rates go up, then alternative income-producing assets become more attractive, and the value of existing bonds falls.

Inflation has shot up in recent months, following the dramatic drop in the price of sterling after Brexit. But it is not at all clear that UK interest rates will rise. The Bank of England has an inflation target of 2 per cent, and inflation is now 2.9 per cent, but as this is due to currency movements rather than an over heating economy, it is unlikely that the Bank will raise interest rates, not least because wages have not risen at the same pace.

This means that fixed income investors need to keep a very close eye on statements from the Bank, and perhaps see what's happening across the Atlantic in the US. The US Federal Reserve chair, Janet Yellen, was due to raise interest rates later today.

Fixed income is a viable source of income for many an investor; but we are living in uncertain times so all bets are off over the medium to long-term.

In this guide

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. According to Aamina Zafar, experts believe interest rates in UK to remain low over the long term. True or false?

  2. How far did sterling fall from end of 2015 to October 2016?

  3. According to Mel Kenny cited in the piece, what option is available for investors looking for a solution for low yielding bonds?

  4. According to Scott Gallacher, quoted in the article, what impact might Brexit have on the economy?

  5. According to Scott Gallacher, what impact could Brexit have on the economy if Brexit goes badly?

  6. According to Lucy O'Carroll, what impact will inflation have on consumers?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • To be reminded about the impact of inflation on interest rates
  • To learn about impact of interest rates on bonds
  • To learn what the long-term outlook might be

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