The tide is going out - is your portfolio covered?

With the bond market signalling that global liquidity is about to dry up, James Ferguson picks the stocks that'll keep you safe.

A year ago, I wrote a MoneyWeek article called Bonds, the end of an era'. I warned that there was no way the bond bull market could last for ever. At some point yields were going to start rising and prices falling. Today it seems my predictions are coming good. The yield on ten-year UK government bonds (gilts) has risen steadily and prices have fallen as a result. In June 2006, the ten-year gilt yielded 4.6%. Now it is at 5.54%, a seven-year high (see chart 1 below).

But it isn't just yields on long-dated bonds that are rising. Short-term interest rates are on the up too. The Bank of England's Monetary Policy Committee (MPC) has just hiked the UK base rate (the rate at which the central bank lends to other banks, and on which all our personal debt is priced) to a six-year high of 5.75%. Most analysts expect it to be 6% before the end of the year, and some are even predicting 6.5%. After all, it's not as if household borrowing has slowed yet, while UK factory production is at its highest in almost six years.

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James Ferguson qualified with an MA (Hons) in economics from Edinburgh University in 1985. For the last 21 years he has had a high-powered career in institutional stock broking, specialising in equities, working for Nomura, Robert Fleming, SBC Warburg, Dresdner Kleinwort Wasserstein and Mitsubishi Securities.