DO UK BOND MARKETS NOW OFFER VALUE?

23.11.2022 Market volatility associated with the mini budget has now subsided. Below we look at whether UK bonds currently offer value to the long-term investor.

Bonds are multi year loans made by an investor to a borrower where the interest payments are agreed in advance. One of the main reasons why UK bonds sold off after the mini budget was because market participants became concerned about how the UK government would pay back all the money it wanted to borrow. The appointment of a more fiscally conservative chancellor, combined with the reversal of most of the mini budget tax cuts, has restored market calm.

Aside from fiscal policy the other key variable for UK bonds is the Bank of England base rate. With an inflation peak in sight the Bank of England is coming towards the end of its cycle of interest rate rises. Indeed, there is a good chance that it will pause in the Spring of 2023 with interest rate around 3.75% (see previous post).

As a result of the market volatility this year and the Bank of England interest rate rises UK company bonds are the most attractive they have been in over a decade. With average company bond interest rates around 5.5% you have to go back to 2011 to better the current rate. They are also attractive when compared to the two percent Bank of England inflation target. If the Bank of England is successful in targeting inflation it potentially leaves the investor with a return of over three percent after inflation.

So, at the present moment in time we think it makes sense to start buying longer maturity company bonds to lock the current attractive interest rates in for the future.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin