Bond Watch: bonds rise on weak economic data

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.  

A good week for stocks and bonds 

After a tricky August, markets finally had reason to cheer as inflationary pressures appeared to ease in Britain.  

In the UK, a purchasing managers index (PMI) figure, which tracks business activity among manufacturers and is seen as a leading indicator for price rises or falls, dropped substantially. The reading was the lowest since January 2021, when the UK economy was in lockdown, and came in below economists’ forecasts. This points to a coming economic slowdown but also lower inflation, which is considered to be good news for stock and bond markets.  

The FTSE 100 is set to finish the week around 1% higher, after falling about 5% over the course of the month. 

• Benstead on Bonds: why interest rate cuts aren’t coming soon
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Bond markets also rose, putting an end to a sustained period of rising yields (caused by falling prices). The yield on the 10-year gilt has fallen from about 4.7% to 4.4% in light of the weaker than expected economic data.  

The Bank of England has a tricky decision to make in mid-September. Markets expect a 0.25 percentage point increase in interest rates, but it could turn the screws even more with a 0.5 point rise.  

This week’s positive data for the bank contrasts with strong wage data last week, therefore giving governor Andrew Bailey lots to think about. 

Bond tables on interactive investor  

With rising bond yields, investors on our platform have been upping their allocation to fixed income, via direct bonds and bond funds.  

In response, we have made it easier to find and research individual bonds. 

All-new bond tables are now available here, showing the coupon and price of the direct corporate bonds and gilts available on ii. 

It’s just a first step, but it allows you to identify a bond, see when it matures (by looking at the bond name), and then get an idea of its income payments by looking at the price and initial bond coupon. 

• Everything you need to know about investing in gilts

To figure out the running yield, which is the income distributed annually, you can divide the initial coupon by its current price, and times by 100.  

For example, 4¾% Treasury Gilt 2030 (LSE:TR30) was issued at a coupon of 4.75%, and the bonds cost 102p today. Therefore the running yield is (4.75/102) x 100 = 4.65%. The yield to maturity, which incorporates the return of the 100p principal on maturity, will be similar as there is not much difference between the 102p buying price and 100p principal.