Record £300bn wiped off UK bonds and gilts as investors flee in biggest market collapse in decades
Just under £300bn has been wiped off the value of UK corporate bonds since the start of this year following a major sell-off in the bond market in what is considered the biggest collapse in two decades.
In the first six months of this year, the total outstanding value of UK corporate bonds has fallen by 13.3% from £2.237 trillion to £1.940 trillion, a fall of £297.5 billion.
This compares to a fall of 3% for the FTSE100 over the same period, digital asset manager Collidr told Morning Wire this morning.
Bond prices have been hit by rising interest rates and rising inflation since the start of the year, in response to central banks tightening monetary policy to control inflation.
Collidr’s research shows that £283.8bn has also been wiped off the value of Gilts (UK government bonds) since the start of the year.
Gilts have fallen by 14.8%, the biggest drop since the 1980s.
The collapse in bond prices has been a major challenge for those who hold bonds for defensive purposes, on the assumption that they will provide downside protection when equities are falling.
Bond sell-off challenges
Colin Leggett, Investment Director at Collidr, explained to Morning Wire that this collapse in bond prices is a major challenge to the concept of the traditional, static 60/40 portfolio solution that many fund managers have developed for retail investors.
The 60/40 strategy is based on the principle that the 40% weighting in bonds will reduce the risks and volatility of the overall portfolio. However, bond prices have become so overstretched that they have been vulnerable to rising inflation and interest rates.
There has also been a misconception that bond prices and the price of shares were uncorrelated.
This led investors to believe that if shares fell then the bond element of their portfolio would offer a partial hedge against that fall. Instead, this year bonds have fallen even further than shares.
Leggett said the sell-off in bonds is the latest evidence that the 60/40 concept does not offer investors sufficient protection against downside volatility.
Investors need to look at alternative asset classes to bonds if they want true diversification, he warned.
Diversifiers might include strategies like long/short equity, market neutral funds, currency trading and assets like commodities, oil and real assets such as property.
“The sell-off in the bond markets is causing big challenges to fund managers.”
Colin Leggett
Investors should also be looking at large cap quality companies with brands that customers can’t live without – those are the kinds of businesses that should perform better as rates rise and have the pricing power to help offset the impact of inflation.
Leggett said: “For investors looking to offset the volatility of equities, corporate bonds are not the answer at the moment.”
“Few individual fund managers have actually worked through a fall in the bond markets of this scale.”
“Many of them are either having to stick with a strategy that isn’t working anymore or are having to go through a steep learning curve to invest in alternative asset classes that they are unfamiliar with.”