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Advisers start to flee bonds on rate fears

Advisers start to flee bonds on rate fears

The latest FTAdviser poll shows a sharply negative shift in adviser sentiment towards bonds, as inflation and interest rate fears move front and centre of advisers' thoughts.

The poll, which was conducted via Twitter, shows that 58 per cent of advisers have started to reduce their clients' bond exposure.

Bond yields have been rising in recent months on fears that inflation will be persistent and thus the fixed income from bonds will be eroded. 

When bond yields rise, the price of the bond falls. 

Central banks have started to respond to higher inflation by putting interest rates up, which increases the returns available on cash, and on bonds issued in the future, and reduces the appeal of many bonds currently in the market. 

Bond investors have been plagued by low yields, but high prices, in recent years, and now face the conundrum that prices are falling, but yields have not yet risen enough to make many of the bonds attractive as income investments. 

And at the riskier end of the bond spectrum, that is, those bonds rated as high yield, prices sell off both because the yield on lower risk bonds is rising so one can access that (in bond terminology, the “spread narrowing”), but also because higher inflation may limit the ability of the riskier companies to generate the cash needed to repay the debt. 

The economic conditions of 2021, where rates were low, inflation was low, and economic growth was present, were ideal for high yield bonds, but the present higher inflation, lower growth environment is probably the opposite.

david.thorpe@ft.com