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Have bond yields found a new norm?

25 June 2018 | Markets and Economy

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With interest rates starting to rise, pushing bond yields higher, many investors are asking how far the trend is likely to go, and how quickly.

For investors whose memories don't stretch back 300 years, our chart shows UK bond yields going back to the South Sea Bubble, a financial crisis that blew up in the early years of the 18th century.

Long-term UK bond yields

Long-term UK bond yields

Source: Macrobond as sourced from the Bank of England.

There are two things to see. One, that crises come and go. Two, that over the (very) long term, bond yields (a type of interest rate) tend to be both lower and less volatile than they have been in recent decades.

Is this important? At a time when interest rates are starting to rise, pushing bond yields higher (and inversely their prices lower), many investors are asking how far the trend is likely to go, and how quickly? The upward push is due to a number of factors. In the UK, unemployment is at 40-year lows, wages are growing and the economy is expanding. Abroad, activity among our trading partners is picking up. The Bank of England, along with fellow central banks, feels justified in saying that the financial crisis is over and super-low 'emergency' interest rates are no longer needed.

How far will it go? Inflation is evident, though stirred by a combination of weak sterling and the rising oil price rather than any economic overheating. An added caution is that Brexit is a long way from settled and the Bank will be reluctant to push up rates in the face of such a major uncertainty. All in all, we think that 'low and slow' will remain the catchphrase. And of course it should be remembered that rising yields are a long-term positive for investors, helping to restore the role of bonds in a portfolio as a source of stability and income.

Important information:

Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the products described above, please contact a financial adviser.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The opinions expressed in this article are those of the individual author and may not be representative of Vanguard Asset Management, Ltd.

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