New industry figures suggest that investors in bond funds are getting nervous. The Investment Management Association (IMA) has reported £624m net redemptions from fixed income funds by private investors in June 2013 – a record total.
The figure means that the funds – which pool investors’ money and buy portfolios of government bonds (known as gilts) and corporate bonds – paid out £624m more to those who sold their holdings than they took in from new investors.
The news comes after months of speculation in investment circles about the possibility of a ‘great rotation’ out of bonds and into shares.
Why are investors selling?
Financial markets have always been influenced by a host of different economic and political factors, but in recent years, the policies, actions and sometimes even comments of central bankers have dominated like never before.
Quantitative easing – which involves central banks creating money in order to buy financial assets – is designed to stimulate the economy but a consequence of the policy has been soaring bond values.
In recent months, speculation has mounted about the possibility of the US Federal Reserve ‘tapering’ its quantitative easing programme, causing anxieties that the bubble in bond markets is set to burst. In June, comments from Fed chairman Ben Bernanke fuelled these fears.
In a move designed to provide ‘forward guidance’ on monetary policy and calm bond markets, the Bank of England governor Mark Carney has announced that interest rate rises will only be considered once unemployment falls below 7% (currently 7.8%). The Bank of England expects this to happen in 2016.
Following Carney’s announcement, the five-year gilt yield increased slightly, meaning the price fell, but markets were relatively calm, suggesting the news was broadly in line with expectations.
What does this mean for bond investors?
The impact of short term fluctuations in the markets can be exaggerated. The average fund in the IMA’s UK Corporate Bond sector fell in value by around 4% in June. The average fund in the UK Gilt sector fell by 2.7% over the same period.
However, some of the lost ground has since been recovered, and with many funds up over 30% in the last five years, the bond bubble may still have some life in it yet.
The turbulence in the bond markets highlights that it’s almost impossible to time the market with any reliability. After a difficult month, many investors sold fearing the worst, but prices have since stabilised.
Meanwhile, bond yields in the region of 4% to 5% will still look attractive compared to cash while interest rates remain at record lows.
A balanced portfolio, containing some bond funds but also those that invest in shares and property should ensure that the impact of falls in any one area is minimised.