The market witnessed a record £300bn wiped off UK bonds and gilts with investors fleeing triggering the biggest collapse in decades.
As the reports come in, we have seen from the start of this financial year the value of UK corporate bonds have a major sell-off which has had a huge impact in the bond market.
As stated by the Digital Asset Manager Collidr, the outstanding value of the UK corporate bond market has fallen by 13.3%, from £2.237 trillion to £1.940 trillion, a drop of £297.5 billion.
At the start of the year, the central banks tightened the monetary policy to control inflation which led to a hit in bond prices with the increase in the interest rates a major factor.
Biggest Market Collapse
According to Collidr’s research, since the start of the year Gilts have fallen by 14.8% with a record drop of £283.8bn- making it the biggest drop since the 1980s. The drop in the value of Gilts (UK Government Bonds) and bond prices has been a challenge for investors who hold bonds for defensive purposes, with the assumption that when the equities are facing a downhill- the bonds could provide downside protection.
Explaining to City A.M, Mr Colin Leggett, the Investment Director at Collidr said that this collapse is a major challenge to the traditional concept of keeping static 60/40 portfolio solutions, because these bonds were used for retail investors by many fund managers. The ratio of 60/40 is such that it will reduce the risks and volatility of the overall portfolio based on its 40% weightage in bonds.
Nonetheless, the increase in the rates of inflation and interest have resulted in an extreme shift in the bond prices. There has also been a misapprehension that bond prices and share prices were unrelated. This in turn has meant that investors started to believe that if the prices of shares fell. Then the bond element of their portfolio would provide a partial fence against that fall. But the opposite is true, the bond prices have fallen even further than the shares.
Challenges faced for selling bonds
According to Colin Leggett, the latest evidence says that the 60/40 concept does not provide the investors with a sustainable protection against downside volatility. He also addressed that investors should look at alternative asset classes to bonds if they need literal diversification. Strategies like long or short-term equity plans, market neutral funds. Currency trading and trade in asset commodities like oil and real assests like property.
Colin Leggett is quoted as saying:
“The sell-off in the bond markets is causing big challenges to fund managers.”
Now, with the biggest market collapse in decades investors. Should be capturing the large cap quality companies that exist with brands customers can’t live without. These kinds of businesses will eventually perform better as rates see a rise and help offset the impact of inflation.
In talks with Leggett, he has said: “For investors looking to offset the volatility of equities. Corporate bonds are not the answer at the moment.” Very few of the individual fund managers have ever worked through a fall in the bond markets at this magnitude. Out of these fund managers, some of them will either go with a strategy which isn’t working anymore. Or will endure a steep learning curve and invest in different asset classes that they themselves are unfamiliar with.
The one certainty is this is a time for investors to look at their portfolio carefully. And make sure that whoever they trust with their investments has the industry experience. And correct investment strategy in place to help secure the future they aspire to.
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