You may have seen recent headlines about rising global bond yields, including UK government bond yields. Matthew Cady, investment strategist at Brooks Macdonald, explains the reasons behind these rising yields, their impact on your investments, and how we are navigating these changes to help protect and grow your investment portfolio.
Global bond yields are rising due to various domestic and international
factors. This article explains bond yields, why they are increasing, and how our investment strategy seeks to manage these changes.
Understanding bond yields and their rise
A bond yield is the annual return an investor can expect to receive each year over the bond’s term to maturity. The level of yield can also indicate the risk associated with the bond. For government bond yields, the yield reflects how the economy is performing given the outlook for economic growth, interest rates, and inflation. UK government bond yields have been rising, with investor expectations impacted by both domestic and international pressures.
Domestic pressures on UK government bonds
Domestically, there are concerns about the outlook for the UK public finances, with the UK’s economic growth outlook currently looking more challenging. In
particular, the Chancellor’s recent October Budget was widely criticised for risking higher inflation pressures from raising employment costs, while also increasing government borrowing.
International pressures on UK government bonds
Internationally, the recent November US election victory of Donald Trump has raised similar concerns. The incoming Republican administration’s plans for
tax cuts and deregulation are likely to keep interest rates higher for longer. While the US has a stronger economic growth outlook, the US dollar’s role as the world’s reserve currency means that higher yields on US government debt can push up government debt yields in other countries, including the UK.
Both of these pressures have led to higher UK government bond yields. However, changes in the yield for longer-dated bonds can have a much bigger impact on that bond’s price than shorter-dated bonds. This is because bonds with a longer time to go until they mature have more time for interest rates to change, and investors can earn more on newer bonds with higher coupons.
What does this mean for your investments with Brooks Macdonald?
Equities: Embracing global opportunities
We continue to prefer equities over bonds. Specifically, in our UK equities allocation, we like larger, more internationally focused companies. Why? Because they are less reliant on the UK’s domestic economy and have a broader global outlook. This means less risk is tied to a single country and better diversification for your portfolio. Furthermore, as these UK companies earn a significant share of their revenue from overseas in foreign currencies, this can offer a counterbalance to any weakness in sterling currency, such as we have seen recently.
Bonds: Stability in uncertain times
When it comes to bonds, we continue to favour shorter-dated
bonds, split equally between government bonds and corporate bonds (most of which are investment grade). With the economic outlook still somewhat uncertain, we like that shorter-dated bonds are less sensitive to sudden changes in the inflation and interest rate outlook while still offering attractive levels of yields.
Looking ahead: Navigating the interest rate landscape
As we look ahead, most western central banks began cutting their interest rates last year, but there is still debate about the pace of future cuts. Where interest rates eventually settle will depend on economic growth and inflation. We know that the inflation debate is far from over. As the macroeconomic picture unfolds this year, we will need to stay alert to both intended and unintended consequences. Our goal remains to respond thoughtfully to these shifts while staying focused on our longer-term investment objectives.
If you have any questions or would like to discuss your investment strategy, please get in touch.
Important information
The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Investors may not get back the amount invested. Past performance is not a reliable indicator of future results. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.
Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Group plc is registered in England No 04402058. Registered office: 21 Lombard Street, London EC3V 9AH.
Brooks Macdonald Asset Management Limited is authorised and regulated
by the Financial Conduct Authority. Registered in England No 03417519. Registered office: 21 Lombard Street, London EC3V 9AH.
Brooks Macdonald International is a trading name of Brooks Macdonald Asset Management (International) Limited. Brooks Macdonald Asset Management (International) Limited is licensed and regulated by the Jersey Financial Services Commission. Its Guernsey branch is licensed and regulated by the Guernsey Financial Services Commission and its Isle of Man branch is licensed and regulated by the Isle of Man Financial Services Authority. In respect of services provided in the Republic of South Africa, Brooks Macdonald Asset Management (International) Limited is an authorised Financial Services Provider regulated by the South African Financial Sector Conduct Authority. Registered in Jersey No 143275. Registered office: Third Floor, No 1 Grenville Street, St Helier, Jersey JE2 4UF.
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