Bond Watch: beat cash with a new low-volatility bond fund

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors. 

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors. 

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Here’s what you need to know this week.

Abrdn launches short-dated bond fund with 7% yield

A new bond fund from abrdn will aim to beat cash returns, with low volatility compared to other fixed-income strategies.

With a yield to maturity of around 7%, and an income yield expected to be slightly below that, the portfolio will easily give investors an income above that in a bank account or in the gilt market, where yields are currently just over 4%.

It will do this by investing in bonds with maturities up to five years, mixing the safest government bonds with higher-yielding corporate bonds. Owning bonds maturing soon keeps the “duration” of the portfolio, which is a measure of price sensitivity to interest rates, at about a quarter of the sterling bond index. This will keep the volatility of the portfolio down, but the value of the bonds will still change, unlike a cash holding in a bank account.

I sat down with manager Mark Munro to discuss the strategy, covering the risks involved, why they launched it now, and what income investors can expect if they own it. You can watch the video here.

ii customers have early access to the fund, up until 23 November 2023, before it is opened to investors on other platforms from 29 November.

More information about the launch can be found here for accumulation units and here for income units.

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Inflation drop welcomed by investors

Rapidly falling inflation in America and the UK has sparked a significant stock and bond market rally.

Inflation this week came in at 4.6% in the UK and 3.2% in America, lower than expected. Bond prices rose, causing bond yields to fall.

The UK 10-year gilt now yields 4.2%, while the US 10-year yields 4.5%. Just a month ago, US borrowing costs were around 5%, which now looks like it was the bottom of the market for bond prices.

Investors are betting that central bank rate rises are done, and a slowing economy could even lead to rate cuts by mid-2024.

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Low inflation, lower rates and economic uncertainty are all good news for government bond prices.

The optimism for the asset class is spreading among professional investors. Bank of America found in its latest survey of large investors that fixed income had hit its largest overweight since March 2009 and bonds were forecast to be the best-performing asset class next year.

In total, 94% of investors surveyed said that bonds, stocks, and commodities would outperform cash next year. The survey took place between 3 and 9 November and covered investors with around $554 billion (£443 billion) in assets.