Prospect of rate cut causes £2.4bn investment in bonds

Prospect of rate cut causes £2.4bn investment in bonds

Investors in the UK piled £2.4bn into bond funds in June, amid political uncertainty and the changed outlook on interest rates.

Data released this morning (August 1) by the Investment Association (IA) showed UK investors placed £2.4bn into UK fixed income funds in that month. 

The US Federal Reserve announced last night that it is cutting interest rates, and a rate cut is widely expected in the UK in the event of a no-deal Brexit outcome. 

Interest rate cuts are beneficial for bond investors, as the income on the bonds they buy today is locked in, so if rates are cut that income will look relatively attractive compared with the income on newly issued bonds. This pushes up the price of the bonds bought before rates were cut. 

The best selling sector in the entire IA universe was strategic bonds, a sector which groups bond funds that can invest across the bond market, rather than being tied to investing in bonds of a certain type. 

This sector saw net retail sales of £1.1bn in June.

Chris Cummings, chief executive of the Investment Association, said the inflows into the bond market this year contrasted with the final quarter of 2018, when investors fled bonds. 

The final quarter of 2018 was marked by turbulence in markets as investors feared that interest rates would rise further. 

Higher interest rates are bad for bonds because the investor is stuck with the previous, lower rate of interest, while bonds issued after interest rates rise pay the higher rate of interest, making the older bonds less attractive, and pushing their value down.

UK equity funds meanwhile had net outflows of £744m in June. The Woodford Income Focus fund, which sits in the IA UK Equity Income sector, had outflows of £151m in that month, contributing a sizeable chunk to the overall outflows. 

Laura Suter, personal financial analyst at AJ Bell, said: “Clearly the ongoing debate in June about who was going to be our next Prime Minister and the increased prospect of no-deal Brexit spooked investors, who once again shunned investing in the UK.

"The previous month had seen the first influx of money to UK funds in two years, but that has proved a mere blip with outflows in June of £744m.

"It marks a torrid year for UK equity fund managers, with £2.7bn withdrawn from the fund over the past 12 months."

She added: “The UK has been a real game of two halves thanks to Brexit. Of the FTSE 100, the 50 most domestically-focused companies have handed investors a 13 per cent loss since the start of 2016, while the 50 companies who get more of their earnings from overseas have returned more than 40 per cent.

"Over the past year the overseas-focused companies have risen slightly, while the domestic stocks have continued to fall around 8 per cent.”