The European Central Bank (ECB), Bank of England (BoE) and the Federal Reserve (Fed) all cut interest rates over the three months to the end of October. The BoE and the Fed also cut again in November.
Usually, when interest rates are cut, bond yields fall. This is because returns on cash and bonds are all relative. If the rate of return on cash reduces, then bonds become more attractive compared to cash. Investors use cash to buy bonds. This extra demand for bonds pushes up their prices, which reduces their yields.
With the Fed, ECB and BoE all reducing interest rates, it’s reasonable to expect bond yields to have fallen recently. However, this hasn’t happened.
The 10-year government bond yields for US treasuries, gilts and German bunds (a proxy for European government bonds) have all increased since around mid-September.
This feels counterintuitive. So, what’s going on?
This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. All investments and any income from them can fall as well as rise in value, so you could get back less than you invest. Yields are variable and not a reliable indicator of future income. Past performance also isn’t a guide to the future.
Bond yields are forward-looking
Earlier in 2024, there were a number of false dawns, where bond yields fell in anticipation of rate cuts. When cuts didn’t come, their yields spiked back up again.
That was until around June, when yields began to trend downwards, although they were volatile along the way.
The 10-year UK Gilt yield troughed at around 3.80% in September, way below current interest rates. Remember though, this is a yield for a 10-year investment so it’s based on expectations of interest rates many years into the future.
The Trump effect
Since mid-September, government bond yields have been on the rise both here and across the pond.
There are a few possible reasons for this, but the first one that springs to mind is the expectation of Trump winning the US Election and then him actually winning it.
His campaign policies have long been noted as likely to cause inflation. Particularly his views around tariffs. And the potential for more tax cuts could increase consumer spending, causing inflation to rise again in future.
What does this mean for bonds?
Higher inflation usually means higher interest rates. With investors expecting Trump policies to be inflationary, at least over the short term, bond markets have moved to expect fewer interest rate cuts in this cycle and yields have increased.
While it feels odd that this is happening at the same time as rate cuts from the Fed, it does make sense. It isn’t rates today or next week that investors are thinking about, it’s rates in 12 or 24 months’ time.
Yield increases have resulted in some price falls. Government bonds have seen the largest losses recently, while some corporate bonds have seen smaller losses.
You can see this in the 12-month performance graph to the end of October for some key bond sectors below.
Performance over 12 months
Annual IA sector percentage growth
Oct 19 – Oct 20 | Oct 20 – Oct 21 | Oct 21 – Oct 22 | Oct 22 – Oct 23 | Oct 23 – Oct 24 | |
|---|---|---|---|---|---|
IA £ Corporate Bond | 4.64% | 1.12% | -18.06% | 3.51% | 10.01% |
IA £ High Yield | -0.19% | 9.78% | -11.77% | 6.85% | 14.49% |
IA £ Strategic Bond | 3.21% | 4.39% | -13.81% | 3.21% | 11.93% |
IA UK Gilts | 5.93% | -5.05% | -22.60% | -6.18% | 5.60% |
It’s hard to predict what will happen to bond yields from here as there are many unknowns. Continued bond market volatility is the most likely, but of course, there are no guarantees.
How have our fixed income Wealth Shortlist funds performed?
Our Wealth Shortlist bond funds have delivered mixed performance over the past year. Some have outperformed their peer group, while others have underperformed.
We wouldn’t expect them all to perform the same though. If all your funds in a sector are performing well at the same time, they're probably investing in similar areas.
Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.
For more details on each fund and its risks including charges, see the links to their factsheets and key investor information below.
Artemis High Income
The best-performing Wealth Shortlist fixed income fund over the past year was Artemis High Income with a return of 18.26%*.
The fund focuses on paying a high income to investors, mainly by investing in bonds. But it can also invest up to a fifth of its assets in UK and European shares.
A focus on high-yield bonds and investments in shares that pay a dividend makes it a little different from most bond funds, though it does make it a higher-risk option.
High-yield bonds have been the best-performing area of bond markets over the 12-month period, which has helped the fund outperform the wider peer group.
The fund tends to only have a small amount invested in government bonds. As government bonds have generally seen smaller increases in value than corporate bonds, this has also acted as a tailwind when compared to peers.
The fund takes charges from capital, which can increase the potential income paid, but reduce the amount of capital growth.
Annual percentage growth
Oct 19 – Oct 20 | Oct 20 – Oct 21 | Oct 21 – Oct 22 | Oct 22 – Oct 23 | Oct 23 – Oct 24 | |
|---|---|---|---|---|---|
Artemis High Income | -2.42% | 11.95% | -13.15% | 6.56% | 18.26% |
IA £ Strategic Bond | 3.21% | 4.39% | -13.81% | 3.21% | 11.93% |
Legal & General All Stocks Gilt Index
The worst-performing Wealth Shortlist fixed income fund over the last 12 months was the Legal & General All Stocks Gilt Index fund, returning 5.36% over the period**.
The fund offers a simple way to invest in UK government bonds across all maturities. It can help diversify a portfolio focused on shares or other types of investment.
The fund takes charges from capital, which can increase the income paid, but reduce capital growth.
As the fund only invests in UK gilts, it’s concentrated, and that means each investment can have a big impact on performance.
Annual percentage growth
Oct 19 – Oct 20 | Oct 20 – Oct 21 | Oct 21 – Oct 22 | Oct 22 – Oct 23 | Oct 23 – Oct 24 | |
|---|---|---|---|---|---|
Legal & General All Stocks Gilt Index | 5.41% | -4.97% | -21.67% | -5.84% | 5.36% |
IA UK Gilts | 5.93% | -5.05% | -22.60% | -6.18% | 5.60% |
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