Fixed Income June 2017 

How to find different yield sources for clients

  • To understand why yield is hard to find.
  • To ascertain which asset classes are providing yield.
  • To understand how yield and risk work for investors.
CPD
30min
How to find different yield sources for clients

Yield is no mug's game: it is an increasingly important part of a client's income stream, whether for accumulating wealth or in the decumulation stage of retirement.

However, low interest rates and rising inflation mean that investors keen to secure even a modest revenue stream to fund their retirement, holidays and children's education must now take on more risk than ever before.

In previous years, before central banks introduced policies designed to get people to spend their way out of economic recession, lending money to the government or leaving it in a bank or building society savings account often provided investors with salaries that comfortably outpaced the shifting prices of goods and services.

The first port of call for income investors has historically been cash for many investors, but they are shunning this now for fixed-income and other options.

Cash struggles to break even    

For example, cash Isas, considered to be a safe and popular way to earn interest on savings, are no longer reliable as a source of income.

Ever since the Bank of England cut the already low-for-long interest rate of 0.5 per cent to a record low 0.25 per cent in August 2016, returns on these tax-free vehicles have plummeted to ridiculous levels.

At the time of writing, the highest paying easy access and fixed accounts paid 1.05 per cent and 1.8 per cent, respectively, falling well short of the 2.7 per cent year-on-year rise in consumer prices. 

Some high-street savings accounts are even worse, offering 0.01 per cent interest. 

According to Royal London, savers yet to swap cash for stocks and shares Isas have effectively missed out on £100bn over the past decade in returns. But where should investors go?

Gilts

Government bonds - especially UK gilts - have often been the next port of call, with investors enjoying a relatively stable, if modest, income stream that beats both inflation and the bank base rate.

However, with inflation surging, Brexit on the agenda and protectionist polices gaining momentum across the globe, traditional go-to fixed income assets such as UK gilts now offer negligible, and even negative returns in real terms.

According to Bloomberg, the current yield on a 10-year government bond is at 1 per cent - far below the current rate of core inflation, which reached 2.7 per cent in April 2017.

Overseas sovereign bond funds have not fared too much better: US treasuries (T-bills) are offering a 2.14 per cent yield for a 10-year duration, while a 10-year German sovereign bond is a paltry 0.25 per cent (as at 7 June).

Given the paucity of yield from the government, investors may need to keep looking further up the risk curve to find yield from fixed income.

UK corporate bonds

Investors put off government bonds thanks to rounds of quantitative easing in developed economies, and the consequent low yields, have been heading to the perceived safety of corporate bonds over recent years.

Comments

CPD
30min
  1. Where is Mr Iggo finding some opportunities?

  2. What does Mr Jory say may affect domestic companies?

  3. According to Mr Brain, which country is an example of one where governments are introducing prudent structural reform?

  4. Why are Mr Inches and Ms Binns selling UK gilts?

  5. What does Mr Jory favour, considering the outlook for the UK economy?

  6. What does Mr Iggo say is a tried-and-tested means of getting diversification?

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