Bond Watch: UK economy beats expectations

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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Growth, but only just 

The UK economy grew 0.1% in the final three months of last year, beating expectations of a 0.1% contraction.  

This followed on from zero growth in the three months to the end of September and comes as a big boost to Chancellor Rachel Reeves.  

However, gilt markets were stable following the news suggesting that the positive growth story does not change expectations about interest rates this year.  

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Neil Birrell, chief investment officer at Premier Miton Investors, said: “It would be incorrect to be talking about an economy that is in good health, after all, it only grew at 0.1%. Worryingly, business investment fell sharply, displaying the level of confidence in the corporate sector at present. The data is better than expected, but nothing to get excited about.” 

The Bank of England last week cut its forecast for UK economic growth this year, from 1.5% to 0.75%. 

Lower interest would be good news for bond prices, as yields would fall (a result of higher prices) to bring them into line with market rates. 

However, what is good for bonds may not be good news for the economy and share prices.  

Better access to direct corporate bonds 

This year we could see a big change to how retail investors access corporate bonds. Currently, nearly all corporate bonds are dealt in £100,000 blocks, which therefore excludes small investors.  

However, the Financial Conduct Authority (FCA) is consulting with the fixed-income industry on changes to include retail investors in credit markets.   

The changes – which could come into force at the end of the year – include a single standard for bonds for retail and institutional investors, guidance on which bonds are suitable for retail investors and “non-complex”, and creating a simpler issuing process for bonds. This could mean more bonds issued with lower denominations.  

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While it would be a “big bang” moment for retail access to corporate bonds, it is actually a return to what fixed-income investing looked like in the past. 

Winterflood, the investment broker, calculated that between 2000 and 2004, two-thirds of non-financial corporate bonds had denominations of under £2,000 and there were 1,500 bonds available to retail investors before the regulation changed in 2005 and made the paperwork required for retail bonds even more complex. 

• Read more about the proposals and what they could mean for investors here