Bond Funds in Rapid Popularity Rise Among Investors
Inflation rates in the UK have been rising of late, steady at a five-year high of 3% over the past couple of months, with further increases expected over 2018. Normal investment logic says that as an investment class, bonds become less attractive during periods of higher inflation. The real value of their fixed-income
3% is not exactly
However, experts at the big UK stock brokers are somewhat baffled by why exactly now they are experiencing such a surge in popularity. Laith Khalaf, an analyst at Hargreaves Lansdown, the UK’s biggest online stock broker is quoted in The Telegraph as commenting that the trend was “very strange”, particularly with the heaviest flow of cash into bond funds coming over the summer as impending interest rate increases were being firmed up.
One possible explanation is that those actively investing online and following the markets are expecting a stock market downturn and have increased allocation to bonds as a defensive move. The long bull run moving into bubble territory has been much discussed and investors approaching retirement will be concerned that it popping now won’t leave them with enough time to ride a major correction out. The yield on 10-year UK Government gilts was also increased to 1.3%-1.4% from 1%, which may have tempted more people into bonds, whose returns rise as their face value drops. A further factor may be an ageing British population preferring the security of bonds to the stock market, especially after several years of gains, a trend that many feel has to end sooner rather than later.
There are some concerns that with most of the past decade, from the financial crisis onwards, having been good for bonds, many bond fund managers lack experience in dealing with an environment of rising interest rates. Interest rates don’t have to rise much for it to start to become difficult to realise good returns from bonds, even if many strategic bond funds invest more in emerging markets and corporate bonds than UK government gilts or U.S. Treasury bonds, that have low returns.
Exactly why bond funds are attracting so much capital at the moment remains an unanswered question, despite the several theories put forward. However, the most likely is simply that investors are attempting to preserve capital by getting out of equities in anticipation of a major correction.
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