We‘ve finally seen interest rate cuts in Europe and the UK.
The European Central Bank (ECB) cut 0.25% from rates in June (but held in July) and the Bank of England (BoE) doing the same cut on 1 August. The US has yet to join the party, but it’s hotly anticipated that the Federal Reserve (Fed) will cut in September.
But what could all this mean for bonds?
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.
Interest rate cuts
With falling inflation in the first half of 2024, the ECB and BoE were both confident enough to start cutting interest rates. Good news for anyone looking to borrow. Whether that’s people trying to remortgage or buy a house, or companies looking to borrow to invest or refinance current debts.
But let’s not get too carried away.
These are just small cuts. And they were anticipated – if anything, they took longer to arrive than most thought. The ECB also held rates at their meeting in July, so we aren’t in a race to low rates just yet.
Central banks face a tough task. UK inflation will likely go up again in 2024, so the BoE need to carefully ensure any increase from here is short lived. No one wants inflation back to double figures but at the same time, central banks don’t want to keep rates too high for too long and cause a recession.
So, lots of small cuts, or a few big cuts, are unlikely at this stage. But the potential for no cuts, or even rises, is unlikely too.
What does this mean for bonds?
Bond prices usually move in the opposite direction to interest rates. This is because if interest rates rise, bonds become less appealing compared to cash. So, people sell bonds, reducing demand, and their prices fall.
Bond yields move in the opposite direction to prices, as prices fall, yields increase. This is what happened in bond markets through most of 2022 and some of 2023 as central banks went through their rate hiking cycle. The result was a high proportion of bond investors experiencing big losses.
Coming back to rate cuts, the hope is this will be the opposite – bonds will increase in value and yields will fall.
But it’s important to remember markets move early, anticipating the future. While UK interest rates have held steady since August 2023, the yield on the 10-year UK Gilt has moved down. From around 4.6% mid-way through 2023 to 4% at the end of July 2024, just ahead of the rate cut from the BoE.
In other words, bonds have already benefited from the expectation that rates will be cut.
Chart showing annual growth in different bond sectors
Annual IA sector percentage growth
Jul 19 – Jul 20 | Jul 20 – Jul 21 | Jul 21 – Jul 22 | Jul 22 – Jul 23 | Jul 23 – Jul 24 | |
|---|---|---|---|---|---|
IA £ Corporate Bond | 5.87% | 2.88% | -11.46% | -5.86% | 10.00% |
IA £ High Yield | -0.16% | 10.70% | -8.83% | 4.12% | 10.85% |
IA £ Strategic Bond | 4.00% | 5.53% | -8.95% | -1.67% | 9.36% |
IA UK Gilt | 10.50% | -4.62% | -14.58% | -15.73% | 5.72% |
Looking forward from here, it’s more likely there will be more rate cuts, not rises. Which means bond prices could keep growing, with yields falling. But of course, there are no guarantees.
These time periods are relatively short and past performance shouldn’t be considered a guide to future returns.
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.
Liontrust Sustainable Future Corporate Bond
The best performing Wealth Shortlist fixed income fund over the past year was Liontrust Sustainable Future Corporate Bond returning 12.98%*.
The fund invests in investment grade corporate bonds, those at the higher end of the credit spectrum. This means the issuers of the bonds in this fund should have a lower chance of defaulting on their payments.
The managers apply revenue based exclusions too, in areas like tobacco, coal and armaments. So, it won’t invest in bonds issued by companies making a lot of their revenue from these areas.
This sustainable tilt means the fund can perform differently to peers at times. For example, it lost more than peers during the bond market sell off in 2022/23. But has bounced back more strongly over the past year.
This fund can invest in emerging market bonds and use derivatives, both of which add risk. The fund takes charges from capital, which can increase the potential income paid, but reduce the amount of capital growth.
Annual percentage growth
Jul 19 – Jul 20 | Jul 20 – Jul 21 | Jul 21 – Jul 22 | Jul 22 – Jul 23 | Jul 23 – Jul 24 | |
|---|---|---|---|---|---|
Liontrust Sustainable Future Corporate Bond | 5.55% | 3.95% | -13.56% | -5.92% | 12.98% |
IA £ Corporate Bond | 5.87% | 2.88% | -11.46% | -5.86% | 10.00% |
Vanguard Global Bond Index
The worst-performing Wealth Shortlist fixed income fund over the last 12 months was the Vanguard Global Bond Index, returning 5.26% over the period*.
The fund invests in a range of bonds issued globally, with all currencies hedged back to sterling. It looks to track the performance of the Bloomberg Global Aggregate Index (hedged GBP). This index includes developed market government bonds and investment grade corporate bonds from around the world.
This fund can also invest in emerging market bonds, and use derivatives, both of which add risk.
Please note as this is an offshore fund, you’re not normally entitled to compensation through the UK Financial Services Compensation Scheme.
Annual percentage growth
Jul 19 – Jul 20 | Jul 20 – Jul 21 | Jul 21 – Jul 22 | Jul 22 – Jul 23 | Jul 23 – Jul 24 | |
|---|---|---|---|---|---|
Vanguard Global Bond Index | 5.67% | -0.18% | -9.49% | -4.29% | 5.26% |