He says that while rate rises have negatively impacted the capital value of most bonds this year to date, “the market is now at a point, particularly in the UK, where it is starting to think about rates being cut next year. That would usually be positive for the capital value of bonds. In truth, the UK economy cannot sustain rates at a level much higher than they are now.”
Fidelity’s Vaid expects the bulk of the returns generated by bond investments next year to be from the income. He says that “just in the past few weeks”, bond prices have risen sharply, and this reduces the capacity for prices to rise much in 2023.
He adds: “With yields having risen to the extent they have, we can now say that bonds are a realistic proposition for an income investor, at least compared with equity income. And for many years, it was the case that equity income was much more attractive than bond income, the fact that is no longer the case really changes the case for bond investing.”
Vanguard's Surrey says: “For government bonds we expect increased volatility, especially given quantitative tightening is taking place. If central banks reverse this, or slow down or keep interest rates lower, government bonds will appreciate in value.
"Currently much of the inflationary news is already factored into bond prices, this is why bonds have made such large losses this year. It would also take large changes in the current environment for central banks to change their current stance.
"For investment-grade bonds, similar to the above, however, we believe they provide good value at the moment especially as corporate fundamentals are strong, such as interest coverage ratios. Income and capital appreciation will both play a role.”
After a decade in which bond volatility was acutely low, 2022 was a wake-up call for many investors; even a return to normal levels of volatility in a post-QE world marks a major change for investors.
david.thorpe@ft.com
