Shaken and stirred by rate hikes? Buy bonds

There are several reasons not to bother with bonds, even at this opportune time of stubbornly high inflation and rising interest rates in the UK and US.

After all, National Savings & Investments and the banks pay reasonable, if not generous, returns on deposits.

However, in the wake of the latest upward move in base rates, it’s worth considering whether you should acquire an interest in the various types of short-term and long-term bonds issued by governments and corporations to raise cash.

This is a $118 trillion global market — too big to ignore, even if you’re still outraged that these supposedly safe haven fixed income stocks have failed to perform amid the geopolitical storms of 2022

Thursday’s rise in key interest rates affected UK gold-edged stock prices. This increased their yields, which move inversely with prices. The yield on a two-year Treasury bond is now 5.01 percent, while a two-year U.S. Treasury bond offers 4.6 percent. These payouts are generous.

Since prices are low, you are unlikely to get back less than you invested today if you hold the shares until maturity when they are redeemed.

Chris Clothier, co-manager of the Capital Gearing trust, says: “The bond market is full of opportunities not seen in 15 years. We are attracted to straight government bonds and five-year index-linked government bonds that offer a real yield – after inflation – of 0.9 percent, as well as short-dated investment-grade corporate bonds that offer a yield of 6-7.5 percent.”

Marilyn Watson, BlackRock’s Head of Global Fundamental Fixed Income Strategy, is also enthusiastic, describing shorter-dated US government and corporate bonds as “very attractive.”

Despite this optimistic sentiment, it’s still possible to be equivocal about bonds, even if you need a source of reliable, low-risk income, or simply want to diversify your portfolio.

The effort required to search for suitable purchases of government and corporate bonds in what Americans call “the credit market,” a phrase now more common here, would be both time-consuming and tedious. The terminology is also off-putting.

Bond ETFs (exchange traded funds) can be a solution. These listed funds are based on an index, with some funds tracking that index, while others, such as the iShares Core UK Gilts fund and the iShares Global Corp Bond ETF, invest in a number of stocks with the aim of matching the index. capital and income returns through ‘replication’.

The Vanguard Global Aggregate Bond ETF puts money into about one-third of the nearly 29,000 bonds in the Bloomberg Aggregate Index, saving investors a significant amount of research.

Paul Syms, Invesco’s head of ETFs in Europe, the Middle East and Africa, says the benefits of ETFs include low cost and transparency.

ETFs are also easy to trade and offer a wide range of positions for different tastes of investors. You can choose between safe funds that contain only UK government bonds, for example, or funds that contain a much more dangerous mix of ‘junk’ corporate bonds, euphemistically referred to as ‘high yield’. The companies that issued these bonds may not be able to repay these loans in full.

Your ETF selection will depend on what you think could happen with interest rates.

For example, if you suspect inflation will remain stubborn, leading the Bank of England to raise rates to 6 percent by the end of the year, a short-dated gold-plated ETF, such as the iShares 0-5 year fund, or the L&G UK Gilt 0-5 Year could be attractive.

Such shorter-term bonds are somewhat less affected by shifts in interest rates than longer-term bonds.

If you think rates may have peaked, the Lyxor FTSE Actuaries UK Gilts ETF invests across a variety of maturities.

Amid the new enthusiasm for bonds, its dangers could be overlooked. Darius McDermott of Chelsea Financial Services comments: “We use UK and US bond ETFs in our managed funds.

“But if you put money into a global fund, keep in mind that the largest holdings will be in companies or countries with the most debt, as they make up a correspondingly large portion of the index. Is that what you want to put your money into in a low-growth world?’

You can earn 4.1 percent with an easily accessible account, which can make bond yields less attractive.

But you can also look at it in another way. Ed Monk, associate personal investing director at Fidelity International, points out that the proceeds will act as a buffer against capital losses if interest rates are raised again.

He adds: “Once interest rates start to fall, bond prices should rise as well.”

Not a bad deal in these challenging times.