Bond Watch: why UK investors are getting the best deal on 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.  

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Here’s what you need to know this week.  

Sterling bonds yielding more than dollar and euro rivals

Research from fund group Schroders shows that UK-based investors are getting a great deal when it comes to bonds, at least in terms of the income on offer.

Bonds that pay investors in sterling yield more than those that pay out in dollars and euros, meaning that top fixed income returns can be achieved without having to stray into other currencies.

Investment grade bonds, which are the safest corporate bonds on the market, yield on average just over 6% in sterling, while those issued in dollars pay around 5.5% and those in euros about 4%.

The pattern holds for riskier high yield bonds, where sterling bonds pay above 10%, but dollar bonds pay 8.5% and euro bonds pay 7.5%.

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Higher yields for sterling assets reflect the higher interest rate expectations in the UK compared with the eurozone and United States, which is an outcome of higher inflation that investors expect to be persistent.

However, if the Bank of England manages to bring inflation back to its 2% target before its early 2025 forecast, then locking in more than 6% from the most secure UK companies could turn out to be an excellent decision.

Buy an annuity? Or stick with stocks and bonds? 

Mixing stocks and bonds will be a smarter investment than buying an annuity or putting an entire portfolio into a fixed rate bond, according to one multi-asset fund manager.

David Jane, of Premier Miton Investors, says that because global equities peaked in May 2021, for them to fall further in absolute or real terms would imply we are in one of the most extended bear market phases of recent history.  This is something he doesn’t think is likely.

“In historical terms, it is very rare to not have made a new high within five years of a previous high. Even from the tech bubble highs in 2000 the world index was making new highs by 2006,” Jane said.

Therefore, he says that investors selling out of equities are doing it at precisely the wrong time.

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“We think it pretty implausible that over the medium-term equity valuations fall materially from here and in an environment of continued inflation, earnings growth is likely to be higher, particularly for the inflation beneficiaries we own,” he says.

His view therefore is that his portfolios are likely to earn returns significantly above those on offer from fixed rate life bonds or annuities.

One reason is that bonds he owns which are set to mature soon will be able to be reinvested into the stock and bond markets and earn returns above those on offer today from annuities