Bond Watch: yields up, shares down
Sam Benstead breaks down the latest news affecting bond investors.
14th March 2025 09:27
by Sam Benstead from interactive investor
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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Bond and stock markets sell-off
This week, UK stocks and bonds fell in tandem, as Trump escalated his trade war and investors grappled with the prospect of higher inflation and slower economic growth.
The FTSE All-Share dropped about 2%, while UK gilt yields rose, with the 10-year gilt now paying an annualised 4.7% if held to maturity.
This was despite good inflation figures in the United States, where CPI dropped to 2.8% for the year to the end of February. CPI at the end of January stood at 3%.
Deutsche Bank strategists said: “Initial positivity began to tail off as the market focus returned to tariffs, and whether that might lead to a fresh rebound in the inflation numbers.”
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This included Canada retaliating against the latest US steel and aluminium tariffs, announcing tariffs on around $30 billion (£23 billion) of US products, targeting steel and aluminium as well. This followed tariffs on the US from the European Union.
Deutsche Bank added: “So collectively, the fear is that this ratchet could be increasingly hard to climb down from over the months ahead.”
Inflation is bad news for bonds, as interest rates could stay higher for longer. It is also bad news for shares, and consumers will feel the pinch.
Can gilts protect you from Trump?
In my latest column on fixed income, I asked whether UK government bonds (gilts) could help hedge a portfolio against the market volatility caused by Donald Trump’s trade and economic policies.
Fund managers told me that bonds could be a good place to be invested, as tariffs could cause an economic slowdown, leading to lower interest rates.
The other side of the argument is that inflation could rise, leading to stagflation – sluggish or negative growth accompanied by high inflation. Stagflation’s last prolonged appearance was in the 1970s.
Another concern for fixed-income investors is that rising government spending – and borrowing – will keep government bond yields high.
Read more here to find out about the role that gilts can play in a diversified portfolio.
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