High-quality investment-grade bonds are 'sensible' additions to portfolios

In line with expectations, the Bank of England hiked base rates by 25 basis points, from 4.25 per cent to 4.5 per cent, as inflation remains in the double digits - a hike that was the same in size as the Federal Reserve and European Central Bank last week.

However, Faizallah said, the Bank of England remains in a uniquely difficult position. While inflation in the US continues to head in the right direction, UK headline inflation remains persistently above 10 per cent, and core inflation is well above target at over 6 per cent.

He added: “Going forward, the Bank of England has a very difficult job, navigating high inflation with a fragile economy.”

The Bank is likely to remain data-dependent as they decide whether to pause or keep hiking, according to Faizallah.

Additionally, policymakers and market participants will be looking closely for signs that show that the UK economy is finally giving in to the pressure of all the hikes to date, which would give them confidence that inflation will fall back to target sooner rather than later.

Faizallah added: “Consumers and corporates alike will likely start to feel the strain, not only from higher base rates but also tighter banking lending conditions. As corporate and household debt refinancing becomes more expensive a slow-down in inflation is likely to be seen, but the pace of decline, and impact on the economy is yet to be seen. 

“We remain cautious from a portfolio perspective, and believe that there is opportunity in fixed income driven by recent increases in government bond yields and widening credit spreads. As we near peak terminal rates, and see ever-increasing catalysts for a recession, we believe that high-quality short-dated investment grade bonds and longer-dated sovereign bonds are sensible additions to portfolios.”