Investors back short-term bonds as markets predict rates peak

Over the past few weeks, FTAdviser has spoken to investment houses piling their cash into short-term bonds. Likewise, do-it-yourself investors have also been taking a short-duration investment strategy when it comes to fixed income investing.

WH Ireland, a wealth manager, said in its quarterly update it was continuing its position of being overweight in short-term bonds, explaining there were “increasing signs that inflation has peaked in the West”.

Last month, five of the 10 most popular investments made by customers of AJ Bell, the DIY investment platform, were government bonds, with the average individual investor pumping in £129,000 into the most popular gilts.

I agree that short-term bonds will likely offer clients good returns.Scott Gallacher, Rowley Turton

“The prospects for bonds are much brighter today than they were two years ago, when high prices and a looming inflationary crisis translated into negative returns for bond investors", Khalaf said.

“Markets are now considering when the interest rate cycle might peak, and with it the yield on bonds. It’s impossible to predict with any accuracy, but expectations are that we are currently there, or thereabouts, which would be a good entry point into the bond market.”

The two-year gilt is currently 4.9 per cent, while the US two-year Treasury has risen to 5.1 per cent. This month, the US two-year Treasury hit levels not seen since 2006.

Short-term bonds are considered particularly attractive because the yield is similar to that of a longer-maturity bond, but you are getting the return without the risk of having longer maturity.

“Because these bonds are maturing in the next few years, you have a higher degree of certainty about the return and less volatility than with longer-duration bonds,” said Ben Seager-Scott from the wealth manager Evelyn.

In general, bonds have become more popular with investors this year.

Last month, three of the top five performing fund sectors were fixed income, according to data from FE Analytics, and Morningstar figures show that fixed income was the only asset class to have two consecutive months of inflows over the summer.

Appropriate approaches

Many advisers, however, are less interested in making specific changes to client’s portfolios based on potentially short-term market movements.

“I agree that short-term bonds will likely offer clients good returns,” said Scott Gallacher from advice firm Rowley Turton. “However, rather than make specific strategic recommendations into these assets, I prefer to use some funds where the manager can make these calls for clients.

“This approach is more efficient as the allocations can be made when the fund manager feels it is appropriate.”

Alistair Cunningham, from Wingate Financial Planning, said that he would not be “so bold” as to make a significant tactical decision on short-term bonds.

He said that current issues in the Middle East could end up being inflationary — potentially pushing up rates higher than expected — and that while bonds would continue to be part of a diversified portfolio, this was principally for the anticipation of some protection should equity markets tumble.

Imogen Tew is a freelance financial journalist