Bond Watch: demand for fixed income soars
Sam Benstead breaks down the latest news affecting bond investors.
4th October 2024 11:21
by Sam Benstead from interactive investor
Share on
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.
Invest with ii: How Bonds & Gilts work | What is a Managed ISA? | Buy Bonds
Investors buy bonds in August
Fixed-income funds recorded the highest inflow of 2024, with net retail sales of £1.8 billion, up from £520 million in July, according to data from funds industry trade body the Investment Association (IA).
In particular, the government bond sectors saw the highest sales with inflows of £837 million, followed by the Sterling Strategic Bond sector at £731 million.
The IA says that the return to fixed income may be a response to recent equity market volatility with bonds helping to provide stable returns for investor portfolios.
It adds: “With further interest rate cuts on the horizon, investors may also want to opt for bond funds, because as yields fall on the back of lower interest rates, it will cause bond prices to rise, boosting returns.”
Falling interest rates are not good news for money market funds, whose returns are closely tied to the Bank of England base rate and do not see capital gains when interest rates fall.
The IA found that money market funds saw their first outflows since March, with net withdrawals totalling £316 million in August.
Bank of England could be more ‘aggressive’
In comments made to the Guardian newspaper this week, governor of the Bank of England Andrew Bailey signalled that he could be more aggressive in cutting interest rates.
He said that the Bank could be “a bit more aggressive” in cutting interest rates provided the news on inflation continued to be good.
This was interpreted by markets as a sign that rates could fall faster than expected. As a result, the pound dropped about 1% against the dollar.
- Will interest rate cuts reduce returns on money market funds?
- Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
- Fidelity Multi-Asset Income video: where to find income now interest rates are falling
There was not a big reaction in bond markets, but if the Bank of England moves faster than expected on rates, such as cutting 0.75 percentage points more this year rather than the expected 0.50 point move, this could send bond markets higher.
Interest rates are currently 5% in the UK. Economists at fund manager abrdn expect the base rate to reach 4.75% by the end 2024, then 3.75% by 2025 and 2.75% by 2026.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.