Bond Watch: Trump’s trade war could boost UK bonds

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

Bonds rise and stocks fall

Stock markets are rightly in panic mode this week. US president Donald Trump has announced tariffs on all the country’s trading partners, starting at 10% and rising to around 50% in some cases.

This has sent the dollar down around 8% versus the pound since mid-January and the S&P 500 down around 10% from its recent heights. For UK investors who own US or global shares, the impact of a weaker dollar and falling market is nearing on a bear market, with the drop currently at 15%.

European markets and those across the Asia-Pacific region are also dropping, but most of the damage so far has been for US assets.

But amid the stock market pain, bonds are proving a relative safe haven. This week, gilt yields are lower, which is a result of rising prices. The 10-year gilt pays 4.6% now, down from close to 4.8% at the start of the week.

• Aftermath of Trump tariff bombshell: winners and losers
• Last-minute ISA ideas for investors looking to ‘buy low’
• The funds delivering under Trump as US shares drop

The reason is that a global recession linked to trade wars would then require central bank stimulus. Lower interest rates mean higher gilt prices. Even if rates stay the same due to worries about inflation, then the yield on gilts offers a good return.

You are “paid to wait” many fixed-income investors have told me, while also owning an insurance policy in the event of an economic crisis.

This wasn’t the case a few years ago, when interest rates were close to zero. Therefore the attractive yields and potential for capital gains today make the case for owning bonds.

Which bonds could you buy?

The bonds you buy depends on what you want them to achieve in your portfolio. If you’re looking for bonds that won’t move much in value but offer inflation-beating income, then short-duration bonds are the answer. Owning gilts that mature in the next couple of years, or picking an active or passive fund that owns “short duration” corporate or government bonds, will give you income without much volatility.

Popular short gilts are UNITED KINGDOM 0.125 31/01/2028 (LSE:TN28) and UNITED KINGDOM 0.125 30/01/2026 (LSE:T26), maturing in January 2028 and January 2026 respectively.

Short-duration corporate bond funds could include abrdn Short Dated Corporate Bond or iShares £ Corp Bond 0-5yr UCITS ETF.

On the other hand, if bond price are rising then these instruments will not rise much either.

• Benstead on Bonds: in a worst-case scenario, can gilts deliver?
• Everything you need to know about investing in gilts

To benefit from lower bond prices, you need to add “duration”, which measures how sensitive a bond is to interest rate changes, to a portfolio.

This could be via longer-dated gilts, or a bond fund that is not limited to bonds maturing soon.

Vanguard UK Government Bond Index, Invesco Sterling Bond and Royal London Corporate Bond should all rise in value if interest rates are falling.