Sell-off in bond markets blow to 60/40 portfolio, expert warns

About According to new findings, £1.3 trillion of UK bond value has been wiped out since the start of the year amid a massive sell-off in the markets.

About £882.6 billion was made up of gilts and indexed gilts, which are down 26.4 percent and 36.2 percent respectively in 2020, according to Collidr, the digital asset management group.

The value of UK corporate bonds has also fallen by £514.5 billion since the start of the year.

However, UK bonds have risen in recent days as market jitters eased following the start of Rishi Sunak’s tenure as prime minister.

Colin Leggett, investment director at Collidr, said: “The unprecedented bond collapse is not only causing problems for pension funds with exposure to Liability Driven Investment (LDI) strategies. The drop is also destroying returns for any investor with a large exposure to UK bonds.

“As bonds have been a cornerstone of many ‘conservatively’ managed fund strategies, such as the archetypal 60/40, many fund managers are suffering from this unprecedented reduction in UK bond holdings.

“Few individual fund managers have experienced a decline in bond markets on this scale.

“Many may have been taken aback by the speed and aggressiveness of the sell-off and some have been slow to scale back their allocation to longer-dated bonds.

“With ongoing economic and political instability, we may just be in the eye of the storm.”

Leggett said the recent bond sell-off is the latest evidence that the typical 60/40 portfolio — where 60 percent of a portfolio is invested in stocks and the rest in bonds — no longer provides adequate protection for retail investors from downside volatility.

Bonds have traditionally been seen as a good ballast for equities. This is because while the price of stocks can fluctuate quite wildly, bonds were believed to be more stable. But in recent months, bond values ​​have fallen as investors feared the creditworthiness of borrowers.

A year ago, the government paid just over 1 percent to investors in its 10-year bonds. Today it has to pay about 4 percent. When interest rates rise, the value of bonds falls.

Longer-term bonds, longer-term bonds, are more affected by higher inflation and rising interest rates.

Leggett added: “Retail investors who thought that having a traditional 60/40 portfolio would provide some degree of protection against a decline in the markets have had a very difficult 2022. In times of economic stress, assets can be correlated in ways that are inconsistent with traditional “perceived wisdom”.

“Many institutional investors using liability-driven investment strategies were unprepared for such extreme market conditions. Investors should always consider the risk that price volatility exceeding recent history will have on their portfolios.”