It has been a busy year for bond investors.
Everything seems to have come at them at once, including soaring inflation and central bank action to raise rates; a war in Ukraine; and political uncertainty in the UK and elsewhere.
Every day, companies are issuing commentary on where investors should go in their 'flight to safety', or whether the old 60:40 portfolio model still holds water.
And, amid so much uncertainty, investors have seen:
- The yield on a 10-year UK government bond, or gilt, fall by 0.09 per cent to 1.83 per cent
- $8bn (£6.63bn) wiped off the value of UK corporate bonds since the start of 2022 to 31 June
- £283.8bn wiped off the value of gilts over H1, according to digital asset manager Collidr
Not for nothing did Chelsea Financial Services’ managing director Darius McDermott recently describe equity and bond market investing as being like a "game of Buckaroo" in an article for FTAdviser.
But, as McDermott has pointed out, fund managers believe a good degree of downside has already been priced into the bond market, with government bond yields therefore set to offer a “greater degree of protection”.
Various commentators, including Vincent Ropers, fund manager of TB Wise Multi-Asset Growth, have set this level of protection at approximately 3 per cent level for US 10-year government bonds (T-bills), 2 per cent for gilts and 1 per cent for euro treasury bonds.
So where should investors go if they need exposure to fixed income? Should they be in gilts or corporate bonds? High-yield or low-yield?
What is the different return profile of various types of bonds? What are the risks that need to be considered when investing in fixed income? Should they be in active or passive fixed income funds?
And what level of bond investment should be in an investor's overall portfolios?
Advisers should know enough about bonds to be able to answer these questions and to explain investment allocation decisions in light of the client's specific circumstances and investment goals.
This CPD will therefore serve as an introduction to bonds. It will look at the role different types of bonds can play in a portfolio, explain how interest rate movements affect bond prices, assess the various risks associated with bond investment and explore active and passive bond investment.
By the end of reading this CPD guide you should be able to:
- Explain what a bond is and how it works
- Summarise the effect that interest rate rises have on the bond market
- List the various risk factors that affect bond investments
- Outline why active bond investment strategies work in uncertain markets.
Simoney Kyriakou is senior editor of FTAdviser