Fixed income was October's only winning asset class

Figures from FE Analytics, the data company, show that most asset classes lost money last month, with only five fund sectors giving investors any return on their cash.

The best-performing funds were in the Euro-denominated corporate bond sector, making 0.94 per cent on average across the month.

Bonds of all shapes and sizes are back on the menu for investors.Laith Khalaf, AJ Bell

The Euro-denominated government bond, mixed bond and high-yield bond sectors and the Sterling corporate bond sector also had positive returns.

“Are bonds finally doing their job?”, asked Ben Yearsley, from Shore Financial Planning. “While everything fell in tandem in 2022, bonds appear finally to be at a place where they perform well in a risk-off environment.

“Currency clearly played a part in the positive returns of the Euro denominated sectors, but even the Sterling corporate bond sector eked out a small gain.”

Poorer performers

Investors in smaller companies suffered the worst fate in October. North American smaller companies was the worst performing sector, losing 7.64 per cent, while UK smaller companies and European smaller companies lost 5.95 and 5.34 per cent respectively.

Bonds have come back in favour recently — especially for new investors. Yields have shot skyward over the past two years and experts say that across the board, fixed income is now an attractive sector.

“It’s the best of times and the worst of times to be a bond investor,” said Laith Khalaf, spokesperson for AJ Bell. “Yields are now high enough to feel like a gold rush for fresh investors but at the same time, rising yields have created heavy losses for existing bond owners.”

The US 10-year Treasury now yields 4.93 per cent compared to 4.58 per cent at the start of October, and then 10-year gilt now pays 4.51 per cent compared to 4.44 per cent a month ago.

Khalaf added: “Bonds of all shapes and sizes are back on the menu for investors. For over a decade, these investments offered little in the way of return and carried significant price risk, but the return of inflation and higher interest rates have changed all that.”

As central banks hint that they are reaching the peak of interest rates — both the Bank of England and the Federal Reserve held interest rates this week — bonds may become more attractive.

One disadvantage of fixed income is that if interest rates move higher, the yield offered on your bond will be lower than the market rate (and so the price will fall, pushing up the yield to match the new, higher rate).

But if rates are likely to be steady or even move lower over the next year, there is less risk of this.

There is still risk involved, however, and there is plenty that could throw the markets. With government bonds, there is a lot of supply around as central banks look to continue or expand quantitative tightening and sell down their holdings.

“The market might not be able to digest all the bonds being thrown at it,” said Khalaf.

There are also elections in the US and the UK next year, as well as high inflation and rising oil prices, all of which could spook markets.

Imogen Tew is a freelance financial journalist