Fixed interest in a different world
Post by Claire McDowell in News
World events in 2022 may have changed the investment landscape more than you might realise.
At the start of last year the Bank of England base rate was 0.25%. Simultaneously, a 10-year government bond (gilt) offered a return for the following decade of about 1.1% a year. With hindsight those rates look pitifully low, but back then we had all become accustomed to minimal rates – the Bank of England’s rate had been below 1% for 13 years.
On 23 March 2023, the Bank of England announced its eleventh consecutive rate increase, taking the base rate to 4.25% – the highest since 2008. At the same time, the return on the 10-year gilt was 2.5% higher than in January 2022 at 3.6%. A similar period of rising short- and long-term interest rates occurred in the US and the Eurozone. As in the UK, the higher rates were a response to a sharp jump in inflation.
While the change in bank rates grabbed the media headlines, for investors the upward move in bond yields was the more significant event. For about 40 years until 2022, the yield on UK government bonds had largely moved in one direction – downwards. Again, it was much the same picture in Europe and the US. In fact, for about three years from the start of 2019, 10-year bond yields in some parts of Europe were negative – guaranteeing the investor a loss to maturity.
The revival in bond yields has important consequences:
- Bonds have become more attractive investments, particularly if you are seeking longer-term income.
- There is now more potential for capital growth from investment in bonds. Partly this is because scope for yields to fall (and thus bond prices to rise) now exists, whereas it had virtually disappeared with near-zero rates.
- Bonds now have a potentially greater role in a diversified portfolio of investments. When yields were on the floor, there was no incentive to hold bonds in preference to equally low-yielding cash.
- Higher bond yields mean better annuity rates, which could alter how you choose to arrange your retirement income.
There are many ways to gain access to the wide variety of bond investments. Advice is essential: while yield is important information, there are many other factors to consider.
Investments do not offer the same level of capital security as deposit accounts.
The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.