Chart of the Week: No Diggity

It’s easy to get sidetracked by the noise in today’s markets, much like in any other area of life. Just last week, while clearing my allotment, I had a lively discussion with a fellow gardener about whether to use raised beds or the classic “no-dig” approach. It turns out there are strong opinions on both sides, each with its pros and cons.

In the investment world, we have our own version of these debates – one of which centres on government bonds.

Right now, investors are facing big questions. Will Donald Trump introduce trade tariffs and reignite inflation? Will tax cuts and increased government spending drive bond yields even higher? With recent market distractions, it’s easy to lose sight of the broader context. But when we look past the noise, we see three key trends that suggest government bonds could offer value.

Why government bonds look appealing now:

Tariff talk likely to be a negotiating tactic – it’s likely Trump will use tariffs as a negotiating tactic in trade negotiations rather than pressing ahead with their immediate introduction, which would risk prolonged inflation.

Inflation is cooling – inflation is continuing on a downward trend, relieving pressure on consumers, companies and central bankers.

Interest rate cuts – many central banks are continuing to reduce interest rates, not least the US Federal Reserve and the Bank of England, which both announced fresh cuts last week.

Bond yields move in the same direction as interest rates – and bond prices move in the opposite direction to bond yields. So, when interest rates are cut, bond prices should rise.

The chart below shows how interest rate cuts should be positive for bond returns, as falling yields translate into rising bond prices. So, if, for example, the yield on 10-year UK government bonds fell to 3% then the projected 12-month return would be 13.6%, according to Bloomberg data*.

In short, assessing the value of bonds requires us to focus on long-term trends, rather than short-term noise. Given the recent volatility, bonds are on higher yields today than we’ve seen for some time. We believe this makes them a compelling choice for those looking to balance risk and reward.

Key takeaway: we believe that falling inflation and interest rate cuts are providing fertile ground for bonds to flourish.

‍

*Data as at 01/10/24

‍

Find out more about our multi-asset solution

‍

‍

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.