Stock markets are still setting record highs, despite the unstable geopolitical backdrop and economic uncertainty. Market euphoria has been boosted by SpaceX's initial public offering (IPO) last week, and by the potential IPOs of OpenAI, the owner of ChatGPT and its rival Anthropic.

Yet market breadth is at record lows. Just a handful of AI-related names have been responsible for virtually all of the MSCI World's performance this year. What's more, in the past, bumper IPOs have sometimes been the sign of a market top.

In the current environment, some investors may want to take some profits, reduce exposure to stocks and remove the temptation to trade, while still remaining invested. Adding some bonds to your portfolio could be part of the answer.

The return of bonds with the 60/40 portfolio

The traditional 60/40 portfolio (60% stocks and 40% bonds) fell out of favour between 2020 and 2024 after a series of unfortunate events. Throughout the pandemic, central banks held rates at, or below, zero, and bonds reached fresh highs. Yet from 2022 to 2024, inflation – which most investors had forgotten existed – returned with a vengeance. As interest rates spiked, bonds collapsed. As a result, a 60/40 portfolio of US equities and bonds returned 17.3% in 2022, its worst performance since 1937, according to Morgan Stanley.

Yet we are in a very different environment now. Yields on high-grade corporate and government debt are sitting at some of the highest levels since 2007, so investors don't sacrifice so much return in buying them (unlike 2020 and 2021). Higher starting yields mean that there is less risk of a sudden rise in rates sparking a 2022-style collapse. So a frothier stock market may make a 60/40 or 80/20 asset allocation look sensible again. The future is impossible to predict. However, a 60/40 approach has historically tended to offer good protection against volatility. A 60/40 US portfolio achieved a compounded annual growth rate of 7.3% over 200 years to 2024, according to Morgan Stanley. Stocks and bonds experienced negative returns in the same year on only 16 occasions, illustrating just how unusual 2022 really was.

Having a mix of bonds and stocks rather than all stocks has meant lower long-term returns. A global 60/40 portfolio would have returned 4% per year between 1901 and 2022 and an 80/20 portfolio would have returned 5%, but an all-stock portfolio would have returned around 6%, according to a report for the CFA Institute. Note also that the risk-adjusted return (the return relative to the volatility) was similar for both the 60/40 and 80/20 portfolios. However, a much more conservative portfolio of 30% stocks and 70% bonds had worse risk-adjusted returns. In other words, once you get beyond a certain point, being more cautious keeps reducing returns, but yields a more marginal reduction in risk.

All this implies that long-term investors should gauge bond exposure carefully and not be too conservative. Overdoing it will probably lead to lower returns. But it can still make sense temporarily to increase exposure in volatile markets.

How to adjust your bond exposure

One easy way to adjust your bond weight is to use a fund series such as Vanguard LifeStrategy, where you can move between the 100% Equity and 60% Equity or 80% Equity funds in a simple transaction. These funds are rebalanced daily and are very cost-competitive, with ongoing charges of 0.2%. Other choices include the Fidelity Multi Asset Allocator and the HSBC Global Strategy series of funds.

Alternatively, consider using a selection of index funds or exchange-traded funds (ETFs), such as iShares MSCI ACWI ETF (LSE: SSAC) for global stocks and Vanguard Global Aggregate Bond GBP Hedged (LSE: VAGS). This lets you adjust the stock and bond weight to your own preference.

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It is difficult to say who is the most clueless when it comes to the outlook for Britain's public finances. Certainly, one can easily laugh at the Labour MP who told The Times that the bond markets “will have to fall into line” if Manchester mayor Andy Burnham becomes prime minister with a more left-leaning agenda.

Yet the way that bond yields have fluctuated according to the perceived odds that Keir Starmer, Britain's least charismatic, least visionary prime minister in living memory, will cling on in his doomed course for a few more months, suggests that the bond markets themselves are having equal trouble grasping reality.

I am always dismissive of “bond vigilantes” because the truth is that these self-proclaimed upholders of financial law and order have long shown a willingness to fall into line with whatever lunacy prevails.

Where was the bond vigilante revolt when central banks cut interest rates to zero and long-term yields fell to derisory and even negative levels in the 2010s? Who thought that loading up on ten-year bonds in that climate – or 30-year bonds or instruments of pure financial self-harm such as Austria's 100-year bond with a 0.85% coupon – was wise?

Yet bond markets got comfortable with the insanity. If not, central banks would have been the only buyer.

Bond vigilantes are letting the real criminal get away

Of course, a defining trait of bond vigilantes is their tendency to do more harm than good by pointing the finger at the wrong culprit and lynching the innocent. So maybe the label is accurate in a way that isn't intended. After all, while many of the policies preferred by the left of the Labour Party are clearly economically harmful, one cannot with a straight face claim that what Keir Starmer and Rachel Reeves are pursuing will avert eventual disaster. Or – to be non-partisan – deny that the governments that preceded them are equally culpable for where the UK stands.

What Britain needs is a combination of pro-growth, pro-business policies combined with huge investment in the physical and social infrastructure needed to facilitate this and address the growing anger and despair that voters feel. Gilt investors seem averse to any hint of the latter. They appear not to fully appreciate that the consequences of the failing status quo will be much more populist governments that will ramp up spending far more recklessly.

One may argue that an Andy Burnham government implies that the ten-year bond yield should be above 5%. I would agree, not least because today's yields are only high if you view the central-banking malfeasance of the 2010s as normal (see chart below). Yet three more years of Starmer (or similar) merits an even higher yield due to the rising probability of even worse outcomes. Fixating solely on “fiscal restraint” is very short-term thinking – not wildly different from buying a century bond to pick up a smidgin of extra yield for a few years.

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Gilt yields – effectively the level of interest that the UK government pays on its debt – rose to their highest level in almost 30 years on 5 May, amid the fallout of the conflict in Iran.

Yields on 30-year gilts reached 5.79% on 5 May and closed the day at 5.74%, marking the highest level for long-dated UK government bonds since the first quarter of 1998.

Shorter-dated gilts yields have also spiked. Yields on 10-year gilts rose to 5.11% on 5 May and closed at 5.06%. Prior to March this year – when 10-year gilt yields briefly reached 5.12% on 23 March – the last time that 10-year gilt yields rose above 5% was in July 2008, early on in the Global Financial Crisis, when they reached a peak of 5.26%.

“The UK is not alone in dealing with disruption from the Middle East but is particularly vulnerable to higher energy costs,” said Anna Macdonald, investment strategy director at wealth manager Hargreaves Lansdown. “The UK is a net energy importer and already faces some of the highest electricity and gas costs in developed markets.”

Local elections which will take place on 7 May also contributed towards the gilt yield spike.

Besides impacting the cost of government borrowing, gilt yields have an impact on your personal finances via mortgage and annuity rates. They can also be a safe investment for your portfolio, on the basis that the UK government is unlikely to default on its debt.

What are gilt yields?

Gilts are bonds issued by the UK government, and as such they are the mechanism through which the government borrows money.

Like all bonds, gilts pay regular income to their owner (who is effectively the person who has lent the government money). The amount of income they pay is fixed, but the price of a gilt can (and does) change depending on how the market perceives the government as a borrower at any given time. If the market sees the government as an attractive borrower, the price will rise, and vice versa.

The yield on any bond (including a gilt) is the amount of income it pays as a percentage of the price of the bond. So a gilt yield is the amount that a gilt pays as a percentage of its price.

When gilt prices fall, their yields rise, and vice versa. So when the market perceives the UK government as a more risky borrower, gilt prices fall, pushing yields up.

The perceived vulnerability of the UK economy to the disruption caused by the conflict in the Middle East has made gilt yields rise.

“Investors are responding by demanding a higher premium to hold UK debt,” said Lale Akoner, global market analyst at investing platform eToro. “If uncertainty persists, upward pressure on yields is likely to remain, with broader implications for borrowing costs and financial conditions across the economy.”

What do rising gilt yields mean for your money?

Gilt yields impact various aspects of the economy and your personal finances.

Higher gilt yields typically mean that mortgage rates will increase, because mortgage rates are typically linked to the yields available in the bond market.

On the other hand, higher gilt yields often mean that annuity rates increase. This could benefit people looking to buy an annuity with some of their pension savings, for a guaranteed income in retirement.

Rising gilt yields also make it more expensive for the UK government to borrow money. This could have knock-on effects in areas like reduced public spending or higher taxes over the longer term.

Should you invest in gilts given higher yields?

In general, gilts – like most forms of government bonds – are considered a very safe investment. The UK government has never defaulted on its debt.

Some argue that it never would – instead, the government might take steps that devalued the pound to the extent that inflation outweighed the value of the interest payments, which remain fixed in nominal terms.

Higher gilt yields mean that gilts are currently relatively cheap. If you are considering adding gilts to your portfolio, now isn’t a bad time – but remember that gilts are cheap for a reason. Markets are pricing in a relatively high likelihood that the UK government’s ability to repay its debt (without hurting its value in real terms) will be constrained for the foreseeable future.

If you do want to buy gilts, some investment platforms will allow you to buy them directly, or you could use an exchange-traded fund (ETF) like Vanguard’s UK Gilt UCITS ETF (LON:VGOV) which tracks an index of gilts with maturities (i.e. lifespans) of one year or more.

Retail bonds offering fixed returns and inflation-busting interest rates are undoubtedly eye-catching – but are they a wise place to put your money?

This month Secured Fixed Income was offering 7.5% interest on a three-year bond, with a minimum investment of £1,000. The money raised is used in its lending activities. It said the fixed return offered “clarity of outcome in a changing interest rate environment”.

That certainly seems appealing at a time when the top savings accounts are paying interest up to 4.75%. But Brian Dennehy, managing director at Fund Expert, warns: “Any product offering an interest rate greater than cash in the bank involves risk. The greater the difference, the greater the risk. The difference here is substantial, so the starting assumption must be that the risk is substantial.”

What are retail bonds?

Bonds are essentially an IOU from a company, which borrows money from investors to fund its spending. Retail bonds are those that can be sold directly to individual investors, as opposed to institutions like banks. Under the bond, the company agrees to borrow for a set period, during which time it will pay a set rate of interest (known as the coupon) and your original capital back at the end. The main risk for investors is that the company defaults, which means it is unable to pay the coupon or to return their investment.

There are two types and, confusingly, neither are actually called retail bonds.

Those listed on the London Stock Exchange (LSE) are, as of January, referred to as access bonds. Designed to Financial Conduct Authority (FCA) criteria, the LSE says these bonds are simple, transparent and appropriate for retail investors. They also have much lower minimum investment thresholds than other corporate bonds, often from £1 rather than the £100,000 or more that traditional corporate bonds tend to require.

A bond from the energy company EnQuest paying 9% (five-year bond at issue, maturing October 2027) is currently available, as is a ten-year bond from RCB Bonds, which raises finance for charities, paying 3.5%. The ten-year bond matures in 2031. Investors can buy these bonds through investment platforms such as Hargreaves Lansdown and AJ Bell.

The other type of retail bonds are known as mini bonds. These are typically higher-risk, unregulated and, unlike an access bond, cannot be bought or sold but must be held to maturity.

These had something of a heyday after the 2009 financial crisis – with mixed success – but are rarer today. Examples include the Hotel Chocolat retail bond, which was launched in 2014 and paid investors in chocolate rather than cash, and the Burrito Bond launched by Mexican fast food chain Chilango in 2018, which promised interest of 8% (as well as one free burrito a week) but collapsed in 2020.

Perhaps the highest-profile of these was a mini bond from the investment firm London Capital & Finance, which promised interest of up to 11%. An estimated 11,600 investors lost a combined £237 million when the firm collapsed in 2019.

How much risk do retail bonds carry?

Crucially, neither type of retail bond is covered by the Financial Services Compensation Scheme (FSCS), so investors have no protection if something goes wrong. If the bond issuer collapses, for example, not only will you not receive that juicy coupon but you could lose all your initial investment.

Jason Hollands, from the wealth manager Evelyn Partners, says: “These bonds might appeal to income investors looking for a better return than cash but without the volatility typically associated with equities. They can also help diversify a portfolio that is heavily weighted towards shares. But it is important to understand that access bonds are not risk-free and not a straight swap for a savings account.”

Those considering an access bond should do their research. Similar to choosing company shares to invest in, consider: how financially robust is the firm, what is the outlook for the business, and how much debt does it already have? Also just like stocks and shares, diversification is key. Don’t concentrate too much of your money in a single bond.

Make sure to understand where bondholders rank in the list of creditors if the company fails, and consider whether the coupon is enough to compensate for the risk. Hollands says: “Higher yields reflect higher risk. If an access bond is offering materially more than a savings account, that is because you are taking on additional credit and market risk.”

While the rebranding of retail bonds to access bonds indicates how the industry is taking steps to make these assets more suitable for investors, many experts remain sceptical.

Dennehy says: “These products have a scary mismatch between the attractive headline offer and the complexity and risks inherent in the underlying product.” While access bonds can be traded before maturity if you need your money back, he warns that because the market is so small, there is no guarantee you would actually be able to sell your investment if you needed to. Even if you are able to sell the bond on the secondary market, a lack of buyers could mean you receive a much lower price than you paid.

What are the alternatives to retail bonds?

Investors seeking regular income could consider a corporate bond fund instead. These hold dozens of bonds, chosen by an expert manager, which spreads your risk in the event that one defaults. Corporate bond funds focus on debt issued by companies, while strategic bond funds hold a mix of company and government debt, depending on where the manager thinks the best opportunities are.

Darius McDermott, founder of FundCalibre, likes the Liontrust Sustainable Future Monthly Income Bond fund, which invests in debt issued by the likes of HSBC and Severn Trent as well as UK government gilts. It yields 5.3%.

He also likes Artemis Global High Yield Bond, which invests in debt issued by Tesco and Aviva, among others, as well as US Treasuries and UK Gilts. It yields 6.51%.

Gilts are another option for income-seekers. This is an IOU issued by the British government and, while the interest paid is often lower than other bonds, the chance of default is minimal. You can access gilts through a fund such as the iShares UK Gilts All Stocks Index fund. It is also possible to buy them directly, which can have tax benefits – but be sure to check the rules.

Finally, if a guaranteed income is your priority, don’t overlook fixed-term savings accounts. MBNA currently pays 4.36% on its one-year savings bond, Market Harborough Building Society offers 4.75% on a three-year bond, and Chetwood Bank pays 4.5% on its five-year bond.

Google owner Alphabet is rumoured to be planning to issue a 100-year bond.

The rare bond issuance would help the Magnificent 7-listed stock fund its artificial intelligence (AI) drive.

The technology firm is keen to expand its investor pool through the sterling-denominated bond, according to reports in the Financial Times.

There is plenty of competition in the AI race at the moment and companies are keen to throw cash at developing tools and software.

It comes as Alphabet’s share price fell last week, even despite reporting revenue and earnings growth in the fourth quarter of 2025, which was blamed on the company raising its capex estimates for the year to $175 billion - $185 billion, up from $91.4 billion in the previous financial year.

A bond may help fund some of this spending and analysts say a 100-year issuance would appeal to long-term investors such as pension funds.

What is a 100-year bond?

A 100-year bond lets a company or government spread out their borrowing and interest payments over a longer periods.

For investors, they benefit from a consistent stream of income while pension funds and insurance companies can use them for liability matching to offset other expenses.

There are of course interest rate risks and the possibility that a company goes bust, which is one of the reasons that such issuances are rare.

An Alphabet 100-year bond would be the first such product since the dot com era in the 1990s, according to Bloomberg.

IBM and Motorola each sold 100-year bonds in the 1990s.

Other 100-year bond issuers include the University of Oxford, Elf and the Wellcome Trust.

Should you back Google for the next 100 years?

Beyond interest rate risk, the big question with long-term bonds is how long the company will be around for.

Google dominates the technology space but there are fears over valuations of AI stocks in the sector and companies can quickly go out of fashion in less than a century.

Liz Malik, director at R3 Wealth, said: “Alphabet is putting themselves as governments and institutions that have survived the ages. Would a tech firm fall into the same category? If anyone can get people to think they are good for 100 years Alphabet can.”

Details of the bond haven’t been revealed yet but Lale Akoner, global market analyst at eToro, suggests a tech company being able to issue a 100-year bond says a lot about how investors are starting to think about the big hyperscalers.

Akoner said: “They’re increasingly being treated less like cyclical tech names and more like long-term infrastructure."

Century bonds are usually the preserve of governments or regulated utilities with very predictable cash flows but Akoner said this potential deal shows that, at least for now, investors are willing to take on very long-dated risk tied to AI investment.

She said: "It also highlights a shift away from tech funding growth purely from large cash piles, towards using debt as AI spending accelerates.”

The potential deal underlines the continued demand from pension funds and insurers for ultra-long sterling assets, Akoner said, adding: “That demand can help keep the long end of the gilt curve anchored, even with heavy supply in the market, although macro conditions and political developments are likely to matter more overall. For credit markets, it’s another reminder that high-quality issuers can still sell very long-dated debt, though a steady increase in issuance from Big Tech could gradually put pressure on spreads.

“The UK was a logical place to issue. The sterling market is one of the few where bonds with 50- to 100-year maturities reliably find buyers, thanks to structural demand from pension funds and insurers. Issuing in sterling also helps Alphabet diversify its funding base and pass some of the very long-term uncertainty around technology and AI returns on to investors willing to take that duration risk.”

Gilt yields – effectively the level of interest the UK government pays on its debt – fell to its lowest level since 2024.

Yields on 10-year gilts fell to 4.37% on 12 January, before edging up to around 4.39% the following day. The figure was above 4.4% for the whole of 2025; this time last year, they were approximately 4.9%.

“So far, 2026 has seen gilt yields fall,” said Hal Cook, senior investment analyst at Hargreaves Lansdown. “Most of the move was last week, but they fell a little further on Monday following relative UK strength compared to the US where Fed Chair Jerome Powell is – yet again – under attack from the White House.”

Last year, a succession of gilt yield surges piled pressure on UK chancellor Rachel Reeves in the build-up to her Autumn Budget.

But in the aftermath of the Budget, gilt yields fell as bond markets were reassured that Reeves had given herself extra fiscal headroom.

A gilt is a bond the UK government issues to borrow money. As with all bonds, gilt yields move in the opposite direction to their price.

In effect, when gilt yields fall, UK government bonds have increased in price – making it less expensive for the government to borrow.

How is the government bringing gilt yields down?

Bond investors like a credible borrower. Gilts are a mechanism through which the UK government borrows money. Just as any bank or building society would if you approached them for a mortgage, bond investors assess the creditworthiness of the UK government before they lend it money.

The UK hasn’t been viewed particularly well on that front (considering its position as one of the world’s largest economies) for some time, but the extra fiscal headroom carved out in the Budget gave Reeves a smidge of credibility.

But a persistent issue is oversupply. The UK government has £2.9 trillion worth of debt and pays £110 billion per year just on servicing the interest. This makes new gilts less attractive to potential buyers – there is already a lot of UK government debt in the market, and the amount it spends servicing that debt makes it a less credible borrower.

Compared to other developed economies, much of this debt is in long-dated bonds.

Bloomberg reported on 12 January that the government is taking active steps to reduce this long-dated debt. It is starting to issue more UK Treasury bills (T-bills).

What is a T-bill?

T-bills are short-dated government bonds. They mature after a minimum of one day and a maximum of 364, though according to Laith Khalaf, head of investment analysis at AJ Bell, most have a maturity of one month, three months or six months.

“Like Government bonds, or gilts, they are loans to the government and therefore have a very high level of safety, as you are guaranteed your money back unless the UK government defaults on its debts, which is extremely unlikely,” says Khalaf.

Unlike gilts, though, T-bills don’t pay any income. They are sold at a discount to their face value. When they mature, the government buys them back at their face value – meaning the investor pockets the difference between the two prices.

Earlier in January, the Debt Management Office (DMO) – the agency that issues gilts and other forms of government debt – said it was exploring the possibility of issuing more T-bills to reduce the amount of long-dated government debt.

“The increased flexibility that comes with issuing shorter-dated paper, particularly when there are concerns around longer-term debt affordability, are a plus,” said Cook. “It’s also positively viewed by a market that has fewer buyers of longer-dated gilts today than it did a few years ago.”

The government hasn’t yet increased its T-bill issuance, but bond markets appear to have reacted positively to the government’s intention of reducing the proportion of long-term debt on its books.

“It's for this reason that longer-dated gilt yields have fallen further than shorter-dated ones, with the 20-year yield dropping around 17bps since the start of last week,” said Cook.

At the start of 2025, I said that investors should “beware the long bond”. The good news is that yields on the longest-dated bonds did not run wild during the year. The 30-year Treasury and the 30-year gilt are ending where they began. Yes, the 30-year bund has gone from 2.6% to 3.5%, while the 30-year Japanese Government Bond (JGB) is up from 2.3% to 3.4%. However, this is healthy: a world in which investors were willing to lend money for three decades at incredibly low rates (well under 1% at times in Japan) is very damaged, and higher long-term rates are a step towards normality.

At the same time, we are seeing early hints of an important shift. While longer-term rates are not coming down, the short end of the yield curve is. With the exception of the Bank of Japan, central banks mostly reduced rates in 2025, including cuts by the Bank of England and the US Federal Reserve in December. This is likely to accelerate in 2026 in the US: markets are underestimating how aggressively Donald Trump and whatever thrall he appoints as Fed chair will try to cut rates to juice the economy.

Time for governments to issue more short-term debt

Rate cuts alone do not solve today’s big problem for governments. Central banks directly set the rate at which they lend very short-term money to commercial banks. Expectations for this largely set the path of short-term bond yields, but longer-term yields are determined more independently by markets. So even if short-term rates come down, higher long-term yields will still push up the cost of interest on public debt.

Whenever a bond issued at miniscule rates a few years ago has to be refinanced, the new rate shoots up. Thus the amount of interest that government pay is steadily rising. They can try to cut spending to bring down debt, but we constantly see that this isn’t politically possible.

The obvious way out is to inflate away debt – but when markets expect higher inflation, they will demand higher yields to compensate, negating the gains from inflation. Central banks could hold down yields by buying up long-term bonds, but a decade of quantitative easing has shown us how much distortion this causes. The best option for now is to cut long-term debt issuance in favour of short-term debt, which pays lower yields. That is what we are seeing in countries including the US, the UK and Japan (that’s why average maturities of outstanding debt are dropping – see chart). However, a flood of short-term debt could unsettle markets and cause yields to rise. Note that earlier this month, the Fed launched a $40 billion programme of buying short-term bonds. It describes this as a technical move to manage market liquidity, but don’t be surprised if this is just the first step in central banks systematically buying short-term bonds.

So here’s a scenario. Governments issue more short-term debt. Central banks a) cut rates below inflation and b) buy more and more short-term bonds to keep yields down. Longer-term yields tick up, and the yield curve gets steeper. How will this affect markets? Is it inflationary? We should start to find out in 2026.

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Private credit is not the catchiest topic. Put it alongside AI or bitcoin, and you can see why it doesn’t make so many headlines. Yet there has been a growing stream of stories over the past year or so about the potential risks that could be lurking in the sector, to the point where big names such as Marc Rowan of Apollo apparently feel the need to step up and defend it.

Shares in Blue Owl Capital, which is exposed to some of the main worries that investors have about private credit, have fallen about 30% this year. It has done noticeably worse than private-markets peers such as Apollo or Ares, which are big players in private credit, but have a smaller proportion of their overall business there.

These jitters may be pretty much irrelevant unless you are investing in private credit. I am a little sceptical about it as an investment, but that doesn’t mean that losses will have much impact on other markets. If private credit has indeed taken lending off bank balance sheets – as supporters claim – it could even reduce the consequences of higher defaults.

Private credit's link to the AI boom

Still, investors who remember the global financial crisis will recall the structured finance boom – mortgage-backed securities (MBSs), collateralised debt obligations (CDOs) and an alphabet soup of other vehicles. These were also supposed to redistribute risks and make the system safer. They ended up doing the opposite. That does not mean that private credit is likely to do the same – there are very significant differences between direct lending and structured finance. It only means that investors should be alert to unexpected consequences.

One of the intriguing aspects of private credit is the growing link to the AI boom. Data centres cost a great deal of money and private credit seems to be funding more of it: UBS estimated in August that private credit to the tech sector had risen by $100 billion (or 29%) in 12 months.

For example, Meta Platforms is building a $27 billion data centre in Louisiana, financed by Blue Owl’s funds. The accounting in this deal is intriguing: the liability is mostly off Meta’s balance sheet on the basis that the tech giant only enters into a four-year contract, renewable every four years – even though it provides a “residual value guarantee” to protect bondholders if it doesn’t renew. Still, Meta is probably good for the money. Some of the other data-centre firms will not be if their customers walk away.

Does this mean that an AI bust would ripple through credit markets, spreading the pain more than expected? Who knows. That’s the problem with private markets. It’s hard to see where the risks lie and who might be left holding the bag.

MoneyWeek has launched a new weekly email newsletter called Investing Spotlight. Dan McEvoy – who has written here on AI and other topics in recent months – will discuss the latest news and trends in investing. Sign up to the MoneyWeek newsletter to get it every Friday evening.

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The Scottish government has announced plans to sell up to £1.5 billion of its own debt over the next five years, the first time the country has issued its own bonds in more than three centuries. The “kilts”, as they will inevitably be known in a play on the British “gilts”, will help finance the devolved administration. The plans took a step forward last week when two of the major agencies, Moody’s and S&P, gave the planned issue an investment-grade rating. The Scottish National Party plans to press ahead, in part to give it more money to play with, but also, perhaps more importantly, to demonstrate that Scotland can flourish on its own and have credibility in the markets.

The trouble is, it is not likely to work out that way. The ratings agencies were quite clear that they were grading Scotland on the basis that it was still part of the United Kingdom, and the debt backed by the Bank of England and the Treasury in London. If Scotland were an independent country it would surely be a very different story.

To start with, Scotland runs a huge budget deficit. For 2024-2025 it rose from £21 billion to £26 billion. That is 11% of GDP, compared with 5.1% for the UK as a whole. If you took out oil, which might not all go to Scotland in a separation agreement with the rest of the UK, it would rise to a terrifying 14%. The rise was largely on account of lower revenues from North Sea oil and gas, but the SNP is fiercely opposed to the oil industry, and wants to close it down as quickly as possible, so the deficit would be a lot worse if the country became independent. Its deficit would rank as one of the highest in the developed world. It is behind Timor-Leste, at 48% of GDP, and Ukraine at 18%, if above Egypt and Zimbabwe. It is hard to believe that borrowing on that scale would be sustainable for very long.

Next, Scotland has a political class that is addicted to spending. Ever since the devolved government was created at the start of the century the one thing it has proved very good at is giving away free stuff. Higher education does not have to be paid for, and neither do prescriptions, or bus travel if you are under 22 or over 60. It makes politicians sound generous. Some of that is paid for with higher income-tax rates in Scotland than in the rest of the country, but most of it comes from subsidies from London. Public spending is already more than £2,000 per person higher in Scotland than in the rest of the UK, but the budget deficit is still huge. It is hard to see any government in Edinburgh changing that.

It's hard to think of anything worse than Scotland's proposed 'kilts'

Finally, Scotland may break away from the UK at some stage, and, if it does so, it may have to issue its own currency. The SNP has always maintained that it can carry on using the pound after independence, if it ever happens, and the Bank of England will remain the ultimate guarantor of its debts. But the government in Westminster has never agreed to it and neither has the Bank. It is hard to see why they ever would. Anyone holding a “kilt” has to reckon with the possibility that Scotland may have to issue its own currency at some stage and that it will sharply devalue against the pound. Measured in sterling, or indeed dollars or euros, they will face huge losses on their holdings.

In reality, it is hard to think of a worse investment. A market in “kilts” will make that painfully clear almost as soon as it is launched. It might start out trading at the same price as UK-issued gilts, but it will very quickly start to deviate from that. If a second referendum on independence is mooted, prices will plunge if there are polls showing a “yes” vote, which paradoxically, will make that outcome far less likely.

If there is a prospect of a vote being held, prices will start to sink as investors weigh the possibility that it might be a Treasury in Edinburgh rather than London that has to pay them back. Scottish politicians pushing for “kilts” might imagine it will strengthen the case for independence and bolster their financial credibility. More likely is that it will backfire spectacularly, making it clear that an independent Scotland would struggle to pay its bills.

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Bond and equity investors are fundamentally in opposition. A bondholder cares only about receiving their interest and capital; anything that puts that in danger is bad. The ideal borrower might be one that takes your cash, parks it in ultra-safe assets to protect the principal and makes paying the coupons the only priority for its cash flow. There is no upside if the borrower takes risks. In fact, there is not even much value in long-term survival: the borrower can fail due to a lack of investment and the bondholder is still happy if they have been repaid in full.

On the other hand, equity – “the fine sliver of hope between assets and liabilities”, as Russell Napier calls it – hopes to profit from growth in earnings or assets. Shareholders want the company to take some kind of risk because they benefit if that risk pays off. If that might increase the chance that loans aren’t repaid, so be it.

This is well understood by markets. Nobody expects bondholders and shareholders to speak in each others’ interests. Yet when it comes to the public finances, that gets completely lost.

All about the bonds

Today, we hear endless talk about why the chancellor needs to cut spending, raise taxes or both. Look at this through the bond-equity framework, and we can see that this is framed in bondholders’ terms: it’s all about making them feel more secure. The discussion rarely touches on whether borrowing is rising because of current expenditure or long-term investment.

Bond investors could make a very valuable intervention by signalling that borrowing to invest in the infrastructure that Britain needs (with a well-costed plan) would be seen very differently from borrowing to fund profligate current expenditure. Yet most talking points simply boil down to “large deficit = bad”.

This reasoning gets stretched into some bizarre pretzel logic. Raising taxes will slow growth since disposable income will be reduced, we are told approvingly. That may curb inflation and allow interest rates to be lowered, which is good for bonds. Yet the idea that anybody else would want weaker growth in an economy that is clearly not overheating is frankly unhinged.

Equity holders in this scenario are everybody who benefits from a stronger economy and more investment. And this is where long-term consequences of the current mindset look so worrying. Consider the visible deterioration in physical and social infrastructure in Britain. Failure to fix this because the government is cowed by the self-important bond vigilantes will open the door further to populist parties.

At present, UK 10-year gilts yield 4.4%. This is not high by past standards: it only feels high because of 15 years of ultra-low rate policy. True, it is high enough that rising interest costs puts even more strain on public finances, which makes the challenge even greater. But what compensation does it offer for, say, the inflationary risk of a future government in five years’ time with a populist mandate to spend and willingness to be radical? Very little.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

How has monetary policy shifted?

Over the past 25 years, monetary policy in advanced economies has undergone an astonishing, unprecedented transformation – dramatically changing in both scope and scale, and blurring the boundaries with fiscal policy. When MoneyWeek published its first edition, there was a broad consensus on inflation targeting, operational independence for central banks and faith in the ability of short-term interest rates to stabilise output and prices. But those turbulent 25 years have seen a radical shift. From the “Greenspan put” to quantitative easing (QE – printing money to buy government debt), monetary policy has evolved in ways that are highly controversial and politicised. Central banks today have vastly higher balance sheets, in some cases manage entire yield curves (that is, use policy to influence rates across different maturities of government bonds, not just short-term rates) and openly coordinate with fiscal authorities in emergencies.

Why is this controversial?

Because, critics argue, the gigantic balance sheets held by unelected central banks as the result of QE, and their “unconventional” monetary policies, have inflated asset-price bubbles, fostered inequality, led to misallocation of capital, and masked unsustainable public finances. Long-term, the chief purpose of monetary policy is to inspire confidence in the value of money by encouraging price stability. In the short or medium term, the aim of policy is to keep the real economy stable – supporting sustainable growth and employment – and to contain risks. Since the turn of the century, however, independent central banks have radically over-interpreted that brief by consistently coming to the rescue of equities and debt markets in ways that have distorted business cycles and deferred pain. Emergency measures have become the norm, and central banks have ballooned.

How have central banks expanded?

For almost the whole of the 20th century, the central-bank assets of advanced economies, as a proportion of economic output, remained remarkably constant, at around 10%-13% of GDP. But in the aftermath of the great financial crisis of 2007-2008 – as governments everywhere turned to QE – that proportion surged, rising above 20% in 2009-2010. And rather than falling back to normal levels as the crisis stabilised, that proportion then doubled once more during the 2010s to 40% – before spiking up to 70% in the aftermath of Covid. Even by 2024, it was still 50%. That’s a revolutionary change in the size of central banks’ financial assets within a couple of decades. Historically, balance sheets merely reflected operations. Now, they are strategic levers shaping long-term yields and risk premiums – a fundamental conceptual shift.

Was QE justified?

Yes, in the immediate aftermath of the financial crisis, decisive action by central banks was vital in stabilising economies and preventing deflation, says Andy Haldane in the Financial Times. By contrast, “later-stage QE, including purchases made in response to Covid, is harder to justify. With fiscal policy highly expansionary, QE’s primary purpose was to placate fretful bond markets rather than boost inflation” – a worrying step towards “fiscal dominance”. Vincent Reinhart, the chief economist at BNY Investments, co-authored two research papers on QE with Ben Bernanke, chairman of the Federal Reserve from 2006-2014, who instituted QE following the financial crisis. “We did not include a section on how to get out of the policy, or the risks stemming from it,” he now says. “That was a mistake – it was a lot stickier than I thought going in and has opened up a range of complications and potential political influences on monetary policy.”

So it’s been hard to get out of?

Indeed. The current era of gigantic public debt has blurred the lines between monetary and fiscal policy, since rate rises (or quantitative tightening) put up debt-servicing costs and infuriate the likes of Donald Trump. In the UK, quantitative tightening triggers indemnities that require the Treasury – ultimately, the taxpayer – to cover central-bank losses. In addition, by pushing up gilt yields, it makes it more expensive to the Treasury to borrow and service its debts. That makes monetary policy more politically charged than ever, and the target of populists who regard central bankers as sources of unelected and illegitimate technocratic power.

What are the limits on monetary policy?

Conventional monetary policy is a famously blunt tool. It has become blunter in recent decades. Financial globalisation and the absorption of China into the global economy, technological change and demographic ageing have lowered real rates. There’s been a relative decline in floating rate debt, meaning rate changes do not necessarily feed through into the wider economy. And rate-sensitive capital-intensive sectors, such as manufacturing and construction, have diminished in favour of services, which are more labour-intensive and less responsive to interest rates, says Marco Casiraghi, director at Evercore ISI. All of this makes monetary policy harder to frame and execute with confidence.

A tough gig, then?

The Bank for International Settlements says that everyone, from governments to central banks to investors and consumers, needs to become more realistic about monetary policy. The idea that it alone can underpin growth is an “illusion”. And the trade-offs that monetary policy involves will “become unmanageable” without “more holistic and coherent policy frameworks in which other policies – prudential, fiscal or structural – play their part”. Central bankers may be even more powerful than 25 years ago. But in an ever more complex and turbulent century, even they recognise that they are not magicians.

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There are times when either you are missing the obvious, or the market is. Commercial property feels like one of those times. Most UK real estate investment trusts (REITs) trade at wide discounts to net asset value (NAV), with shares still lower than they were a decade ago, despite a regular flow of solid operating updates from key players.

We can clearly worry about certain subsectors – eg, the oversupply of lower-grade offices, made fit only for redevelopment by new energy-efficiency standards or changing work patterns. Yet UK commercial real estate is very diverse: we tend to notice and talk about offices out of all proportion to their share, as Marcus Phayre-Mudge of TR Property Investment Trust (LSE: TRY) pointed out at the Association of Investment Companies Showcase last week. Pure office REITs are only around 5% of the total.

There are a few REITs that trade closer to NAV because of their distinctive strategies – improve-and-sell specialist AEW UK Reit (LSE: AEW), fast-growing LondonMetric Property (LSE: LMP), Sirius Real Estate (LSE: SRE) with its exposure to Germany, Supermarket Income Reit (LSE: SUPR) with its long, inflation-linked leases – but many are on 30%-plus discounts. This could imply NAVs are greatly overstated. Yet institutions such as Blackstone are snapping up smaller REITs at a premium to where they are trading (if still, usually, some discount to NAV).

Why the uncertainty surrounding UK REITs?

There are a few top-down possibilities. First, investors were shocked by the rapid rise in interest rates in 2022. That makes them still cautious about where rates will be as REITs refinance maturing debt and the impact of that on earnings. Note how the sector tends to gyrate as five-year swap rates – a rough benchmark of how new debt will be priced – go up and down.

Second, the rise in longer-term bond yields will be affecting valuations. A fixed yield from a 10-year bond is not the same as income from a physical asset that varies with inflation and rental demand, but higher yields still influence where institutions put their money. This affects the underlying assets more directly than the listed REITs, but the uncertainty is not helpful.

Third, there are many self-reinforcing factors. A sector trading at persistent discounts cannot easily raise equity to fund deals. This means they cannot seize opportunities to snap up cheap assets as other investors exit the sector. They cannot grow and remain sub-scale, or fall behind the rising size and liquidity requirements that buyers such as wealth managers require. Thus the sector consolidates (okay), or is bought out by private equity (bad for public markets).

Real estate is of course very cyclical. Maybe it is now primed for a strong rebound, as Phayre-Mudge argues. In the meantime, TR Property (which invests across Europe and sees plenty of value in other countries as well), a passive fund such as iShares UK Property ETF (LSE: IUKP), or a diversified basket of REITs will all earn some income – TRY yields 5%, IUKP yields 4.3% – while waiting for sentiment to change.

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Manulife CQS New City High Yield Fund (LSE: NCYF) aims to provide investors with a high gross dividend yield (currently 8.8%) and the potential for capital growth by investing mainly in undervalued, high-yielding fixed-interest securities. Around 87% of the portfolio is in fixed-interest securities, with 13% in equities (there is a 20% limit on equity exposure). With respect to currencies, 69% of the portfolio is in sterling, 18% in US dollars and 13% in euros.

As one of the smaller fixed-income funds, NCYF can participate in highly attractive small corporate-bond issues, which are often inaccessible to larger funds owing to their minimum-size requirements. The manager’s prudent risk-management focus has resulted in only three defaults since the fund’s inception in 2007 and enabled NCYF to increase the dividend every year for 18 years.

Three overlooked companies to consider

The largest holding is Shawbrook Group 12.103% Perpetual. Shawbrook is a challenger bank offering lending and savings services for commercial (real-estate and smaller companies) and retail (mortgage- and consumer-finance) customers. It is highly profitable, and its organic growth has been boosted by acquisitions in areas such as vehicle finance and smaller-company lending. Its Common Equity Tier 1 ratio (a gauge of a bank’s core capital adequacy) hovers around a comfortable 13% (3% is the minimum requirement).

The balance sheet and loan book have more than doubled in the last five years to £20 billion and £17 billion respectively. As is true of most challenger or specialist lenders, underwriting at Shawbrook is often manual, reflected in robust net-interest margins of 400 basis points, and a moderate cost of risk of 40 basis points.

The funding side is driven by retail savings, mostly fixed-rate and term, and 90% of the £16.7bn of retail-savings deposits are small enough to be insured by the Financial Services Compensation Scheme. The bank’s lack of coverage by equity analysts and infrequent smaller bond deals means it is often overlooked.

Consider also Stonegate 10.75% 2029. The firm operates a network of pubs, clubs and bars. It is a large player in a fragmented market with a market share of 10%; a supportive sponsor, as demonstrated by its last £250 million equity injection; good asset coverage, with £3.2 billion of real estate; and an improved financial profile. Although Stonegate still faces headwinds and the environment remains volatile, the company is advancing on its initiatives to optimise its assets through the conversion of pubs, disposals, and reducing the number of late-night venues.

There is also a focus on bolstering its appeal to customers, price increases with limited volume elasticity, and cost control. All these factors should lead to an improved free cash-flow profile. The group has no near-term maturities, while liquidity remains adequate. We believe that at 10.75% the bonds remain attractive.

Frontline (NYSE: FRO), the largest equity holding, is a world-leading shipping group transporting crude oil and refined products with a modern, energy-efficient fleet of tankers. Frontline is a beneficiary of sanctions against Russia and Indian refiners shifting some of their imports into the compliant market.

Should the war in Ukraine end, any exports of Russian crude would need compliant, insurable ships rather than the uninsured dark fleet currently used. We are also seeing a major increase in exports from West Africa to Asia, a highly profitable route for shippers. The high payout ratio makes this stock attractive for income investors.

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The run up to the Budget in November has already been dominated by headlines about a “meltdown” in the bond market and a yawning “£50 billion” black hole that will have to be filled by more tax increases. Some have even speculated that the UK is heading for another IMF bailout. Mercifully, the prospects may not be quite as dire as these reports suggest. But the recent increases in the cost of government borrowing are consistent with an emerging fiscal crisis. The chancellor is increasingly boxed in by her own fiscal rules – and there is no painless way out.

The problems are most apparent in the yields on 30-year UK government bonds, known as “gilts”, which have jumped to their highest level since 1998. This partly reflects a global shift upwards as investors become more jittery about increases in public debt worldwide. Similar headlines are being written in many other countries, notably France and Japan.

Nonetheless, the UK now consistently has the highest bond yields in the G7 group of advanced economies. The cost of new government borrowing for 10 years is currently around 4.6% in Britain, compared with 4.0% in the US, around 3.5% in France and Italy, 3.2% in Canada, 2.7% in Germany, and just 1.6% in Japan. This is all the more remarkable because UK public debt is not particularly high by international standards. In fact, the ratio of debt to national income in the UK, at around 100%, is lower than in Italy, at 135%, and much lower than in Japan, at 240%. Even Greece, with debt still over 150% of GDP, can borrow at 3.3%.

Why the UK seems stuck in a doom loop

Why has the UK become such an outlier? There are three main reasons.

First, many international investors are losing confidence in the Labour government’s willingness to take tough decisions to bring borrowing down, especially after the recent failures to curb welfare spending.

The prospect of more tax rises is simply reinforcing fears that the UK is stuck in a “doom loop” of sluggish growth and deteriorating public finances.

Second, the Bank of England has been actively selling its holdings of government bonds, reversing the previous policy known as “quantitative easing” (QE), and doing so more aggressively than other central banks.

The Bank itself has said that the new policy of “quantitative tightening” (QT) may have added as much as 0.25 percentage points to 10-year gilt yields. This additional selling is especially damaging at a time when there is less demand from defined-benefit pension funds, who traditionally have been big buyers of longer-dated government bonds. In turn, this helps to explain the relatively large rise in the yields on 30-year gilts.

Third, there are fears that higher inflation in the UK will keep official interest rates higher for longer too, while adding to the cost of inflation-index-linked borrowing (of which the UK has a relatively large amount). By contrast, yields in the euro area and Japan are anchored by relatively low inflation and the relatively low interest rates set by the European Central Bank and the Bank of Japan.

This does not mean that a full-blown debt crisis is imminent in the UK, or even inevitable. The increase in bond yields only affects the cost of new borrowing, not that of existing debt, which provides at least some breathing space. The average time remaining before each conventional gilt has to be refinanced is more than 13 years, with only 16% falling due in the next three years. The average left on index-linked bonds is even longer, at more than 17 years.

It is worth stressing, too, that the rise in government bond yields has been relatively orderly, with little contagion to other markets. Investors have been demanding higher returns to compensate for higher risks, but there has been no shortage of buyers at the lower prices. And when more cash is required, the government’s Debt Management Office is now selling more gilts with shorter maturities to avoid having to pay the higher interest rates on longer-dated bonds.

So far, this episode is therefore still different from the crisis in the wake of the mini-Budget in September 2022. The sell-off in gilts then was accompanied by a panic in the mortgage market, prompting residential lending to dry up. The sharp falls in the prices of gilts also caused immediate problems for some pension funds. The pound slumped too.

Is a 1970s-style debt crisis looming?

The UK is not yet on the cusp of an IMF bailout, either. Admittedly, an increasing number of commentators are warning of a “1970s-style debt crisis” unless the chancellor changes course.

These voices include three leading economists – Jagjit Chadha, Andrew Sentance and Willem Buiter – who are not the usual suspects and whose views should be taken seriously.

Chadha and others have also made the reasonable point that IMF involvement might enhance the credibility of the fiscal framework and restore some market confidence, thus attracting more private capital, which could dwarf the limited resources available to the IMF.

Nonetheless, the circumstances now are also different from the 1970s. The bailout from the IMF in 1976 was a US dollar loan. This was mainly used to pay back other countries that had lent foreign currencies to the UK government as it attempted to prop up the pound. That is not the problem now.

The UK is not facing a sterling crisis (at least, not yet) and the government would be right to let the pound fall if it were. Any IMF bailout would also come with such punitive conditions that it would be politically unacceptable, including big cuts in public spending.

Put another way, if the UK government were willing to take these tough decisions, we would not need the IMF in the first place. An IMF-imposed austerity programme would surely be the end for both Rachel Reeves and Keir Starmer, especially with the emerging threat from Jeremy Corbyn’s new far-left party. The markets would not necessarily be reassured.

More positively, the prospects for the UK are still better than in the 1970s – in some respects. The economy shrank by about 4% in total in 1974 and 1975, unemployment rose sharply (from a low of 3.7% in 1974 to a peak of 11.8% 10 years later), and both inflation (peaking at 24% in 1975) and interest rates (the Bank rate hit 15% in 1976) were much higher.

Averting a debt crisis: try the stop-gaps first

Finally, there are other things the authorities might try before calling in the IMF. In an emergency, the government could borrow short-term funds through an existing overdraft facility at the Bank of England, known as the “Ways and Means” (W&M).

There is a recent precedent; an agreement in April 2020 allowed for more use of the W&M during Covid, although this was never actually needed.

And if the bond markets did become disorderly, the Bank of England could step in to buy gilts again on a temporary basis – as it did (remarkably successfully) in September 2022.

But this is only partially reassuring. These stop-gaps could backfire if they are seen to underline just how big a mess the public finances are in, and if the government does not use the breathing space to tackle the underlying problems. Less positively, the public finances are now in a bigger mess than in the 1970s.

The annual budget deficit was similar (averaging 6% of GDP in 1974 and 1975), but the stock of debt was far lower (about 48% of GDP, compared with 96% now). Another new risk is that roughly a quarter of government debt is now linked directed to the rate of inflation.

In any event, the latest bond-market wobbles could hardly have come at a worse time. In a few weeks’ time, the Office for Budget Responsibility (OBR) will start to crunch the numbers for the Budget.

Importantly, the OBR’s forecasts will be based on whatever the markets are assuming about the path of interest rates over the next five years. These assumptions could therefore eat further into any remaining headroom against the government’s fiscal rules or, more likely, make the existing shortfall even larger.

In turn this could prompt Reeves to announce even larger increases in taxes, hitting consumer and business confidence hard and having an immediate impact on economic activity.

It is also still possible that the nervousness of bond investors will spill over into other markets, including equities. The property market already appears to have stalled again.

Sterling is especially vulnerable too if the loss of international confidence becomes a rout, which again could have an immediate impact on other asset prices, on inflation, and on the real economy.

At the moment, the risk of a sterling crisis is being minimised by the fact that other countries are in trouble, too. But that could easily change if the UK were seen as an even bigger outlier.

Time may be on the government's side

The main hope now is that conditions may improve before the Budget itself on 26 November. The relatively late timing has raised fears that a longer period of speculation and uncertainty will undermine confidence further. But there could be some advantages too.

Perhaps most obviously, the delay leaves more time for global bond markets to calm down, taking some of the pressure off borrowing costs in the UK.

This could also work in the opposite direction if there is more bad news from elsewhere, perhaps the US (for example, higher tariffs could finally feed through into consumer price inflation, exacerbating the tensions between Donald Trump and the Federal Reserve), or from France, or from half a dozen other countries where concerns about fiscal sustainability are also growing.

Fortunately, an improvement in global sentiment is not the only potential upside from having a late Budget. The second positive is that the UK government would have more time to find some new savings on the welfare bill to replace the £6 billion lost to the U-turns on working-age benefits and winter-fuel payments. These savings would still have to be acceptable to Labour MPs, but the government would have longer to get the politics right.

The government will also have extra time to persuade the OBR that the planned increases in public investment and supply-side reforms will boost the productive potential of the economy.

Indeed, the growth assumptions will be even more important than the assumptions about inflation and interest rates. The increase in gilt yields since the OBR’s forecast for the Spring Statement might add about £5 billion to the shortfall that has to be filled by spending cuts or tax increases. But this shortfall could swell to £50 billion if the OBR adopts the same pessimistic forecasts for productivity and growth as those used recently by the National Institute of Economic and Social Research (NIESR).

Fortunately, NIESR’s £50 billion is an outlier. It is still possible that the chancellor will be able to keep the fresh pain down to around £20 billion, with at least £5 billion of that coming from welfare savings rather than tax increases.

That might be the least bad outcome, and perhaps even a relief to some. But there can be little doubt that the UK is in the early stages of a crisis that could play out in many different ways – with or without the involvement of the IMF.

Julian Jessop is an independent economist.

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Investors are nervous. There are few other ways to read the latest gains in gold – above $3,650 per ounce for the first time this week – or the big moves in long-dated government bonds. Yet some markets look remarkably unperturbed.

Take credit spreads – the gap between the yield on government bonds and corporate debt – which tend to blow out at times of stress.

Spreads for US investment-grade bonds are instead at their tightest since 1998, barely 0.8 percentage points (pp) above the yield on comparable Treasuries. Eurozone investment grade bonds are similar; they have been tighter at times (eg, 2007 and 2018), but remain very low. Spreads for non-investment grade bonds (known as high-yield) are around 2.9pp, a bit higher than they were earlier this year in both the US and European markets. But they are still right at the bottom of their long-term range, and below the 4%-plus area they hit in April – which was not itself exceptionally high.

The growth of private credit

One theory holds that spreads are tight because government bonds are getting riskier and no longer offer a real “risk-free rate” to benchmark corporate bonds against. Some argue that top-grade corporate credit could trade on lower yields than governments (the spread on US AAA-rated bonds is around 0.3pp).

This feels like a stretch. The most likely escape route for governments is to have central banks buy bonds at low yields – a precedent set under quantitative easing. That is probably inflationary and inflation will hurt low-yield corporate bonds. If you expect this, you should demand higher yields, not settle for less.

Another argument with high yield, in particular, is that the corporate bond universe is of higher quality now. The growth of private credit – the hottest area in alternative assets over the past few years – means that lower-quality borrowers have migrated there to get more favourable terms. That has left the better borrowers in bonds. There is probably some truth in this, but spreads still look so tight that they don’t provide much compensation for risk.

Of course, tight spreads also explain why higher yields in private credit have proved so attractive. The challenge with private credit is that it is by definition less public, so it’s harder to have a clear picture of the market and how much risk investors are taking to earn, say, 200pp more yield from something much less liquid.

On the face of it, default rates remain low – around 1% according to a recent paper by ratings agency S&P Global. But this relies on a narrow definition of default and ignores selective defaults, such as converting cash interest into more debt, repayment holidays or extending debt maturities. Include those and defaults have been much higher, says S&P, despite the benign environment. Data from other analysts paints a similar picture. One has to figure there will be a reckoning here when the cycle turns, making low credit spreads in bonds a dangerous reason to reach further for higher yields in private credit.

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The sale after 17 years of the last of the government’s stake in NatWest has led some to claim that this was good news for the banking sector. The stock overhang has been removed, and the sale has got the state off its back, they say.

Don’t count on it. Instead, this could herald open season for the government on the UK’s banks, meaning higher taxes, more regulation and the endorsement of new crackpot compensation schemes dreamed up by disgruntled consumers and grievance-chasing lawyers.

More insidious still is the cunning plan by Reform to save £35 billion by the Bank of England (BoE) ceasing to pay interest on deposits held at the central bank by UK lenders. This proposal is so deluded that, almost inevitably, the government will adopt it.

The banks would seek to mitigate the loss of income by removing their deposits from the BoE and either investing in short-term gilts or lending to the private sector at whatever interest rate they could get. The former would bring down yields in the short term, helping the government to finance its borrowing requirement; the latter would reduce private sector borrowing costs. The snag is that the BoE would lose control of market interest rates.

The stimulus to monetary growth would create a spiral of rising inflation and a weakening currency, with the Bank of England and government powerless to stop it. Banks would be trebly hit: by the loss of revenue, the boom leading to bust with multiple insolvencies, and by the lower valuation of their shares in foreign currency terms.

Investors should instead consider the Polar Capital Global Financials Trust (LSE: PCFT). Almost 90% of the trust’s assets are invested outside the UK: 40% in banks (JPMorgan is the largest holding at 7%), 18% in insurance and 38% in financial services such as Mastercard and Visa. The portfolio has returned 19% over one year, 54% over three and 118% over five. Since NatWest, Lloyds and Barclays have all performed considerably better than that, now might be a good time to switch out of UK financials and into PCFT.

Moving away from bank stocks

PCFT managers Nick Brind and George Barrow have significantly reduced their exposure to banks in the recent years – their allocation to the sector was 59% of the portfolio three years ago and 49% two years ago. “Some banks are great businesses,” says Brind, “but we see better opportunities elsewhere.”

“The sector has performed very well and valuations have risen but earnings have grown faster than the market,” he says. “When we started, 12 years ago, the sector was trading on a 15% discount to the broader market; now it’s on 12 times earnings or 11 times excluding the data-service companies such as Visa and Mastercard. This is a 30% discount to the market.”

Financials have been widely distrusted by investors since the 2008 financial crisis, but “banks have been forced to clean up their act, and a lot of risk has been shifted off-balance sheet. The financial system has much more capital and liquidity, household and corporate balance sheets have seen a significant strengthening, yet the sector remains unloved.”

The sector would benefit from lower interest rates and lighter-touch regulation in the US and Europe. “We believe it would take a severely negative macroeconomic scenario to end the sector’s relative outperformance,” says Brind.

PCFT is trading at a 5% discount to net asset value (NAV). It offers the chance to redeem at NAV every five years, and the latest redemption cut the market cap by more than 40% to £350 million. Fees have been reduced, and a revised dividend policy pays 4% of NAV yearly.

An equally compelling investment worth considering is Polar Capital’s Global Insurance Fund, which has returned 98% over five years and 223% over 10.

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The world has always been an unpredictable place for investors, and it has become more so over the past five years. Digitisation is partly to blame. News can travel from one side of the planet to another in seconds. The news can then be manipulated and redistributed in a heartbeat, sometimes with devastating consequences. Digital technology has also accelerated the pace of change across the economy. Start-ups powered by AI are reaching revenue milestones once thought impossible.

Y Combinator (the start-up accelerator known for backing Airbnb and Dropbox) recently said its latest batch of tech start-ups was growing at 10% per week, an unprecedented rate in a start-up venture. Most of these companies would have had to hire large teams of expensive human coders a few years ago. But today, 95% of the code has been written by AI.

These digital changes are coming at a time when populist political parties have upended the global political order. Donald Trump’s global trade war has disrupted trading networks established over decades and threatened the dollar’s status as a safe haven. Furthermore, the world’s largest countries are drowning in debt, severely hampering their ability to respond to future crises.

Multi-asset trusts offer added protection

Against this backdrop, it is worth considering the place of multi-asset trusts within a portfolio. Maggie Fanari, CEO at J. Rothschild Capital Management, the manager of RIT Capital Partners (LSE: RIT), notes that multi-asset trusts such as RIT “offer investors access to differentiated global strategies, hard-to-reach assets, and long-term structural themes, making them highly complementary to most portfolios… A multi-asset approach gives us the ability to respond decisively to shifting macroeconomic conditions across a market cycle.”

Multi-asset trusts also provide investors with an added layer of protection through diversification. “Diversification is famously the only ‘free lunch’ in finance,” says Alastair Laing, CEO at CG Asset Management and co-manager of Capital Gearing Trust (LSE: CGT).

The closed-ended structure of an investment trust is perfectly suited to diversification and multi-asset holdings, some of which are likely to be illiquid. “Our permanent capital base gives us a structural advantage, enabling us to maintain conviction in high-quality investments… ride out short-term volatility, and allocate meaningfully to less liquid opportunities,” says Fanari.

Of course, investors could build their own multi-asset portfolio – encompassing assets such as bonds, equities, gold and even exposure to illiquid assets, such as private equity and renewable energy – via investment trusts. However, this comes with another set of risks. “This requires significant effort and could be tax-inefficient if capital gains tax is crystallised each time rebalancing occurs,” explains Laing.

Investors pay a fee for a trust’s portfolio management, but they’re paying for the managers’ skill. There are also tax benefits, as the assets remain within the trust. A trust such as RIT also provides exposure to somewhat exclusive private-market themes. “We also benefit from access to specialist managers,” says Fanari. “These specialist partners value our long-term, patient capital.” All of the big multi-asset trusts, Capital Gearing, Personal Assets (LSE: PNL), RIT and Caledonia Investments (LSE: CLDN) offer something slightly different, with the latter more focused on private equity. Capital Gearing and Personal Assets have also favoured a more defensive approach, focusing on bonds (mostly inflation-linked), gold and equities.

Personal Assets’s co-managers, Sebastian Lyon and Charlotte Yonge, say the investment team’s views in recent years have been “shaped by an expectation of regime change”. Inflation, government debt, shifting political sands, economic uncertainty and technological change have created a “world of greater uncertainty, higher inflation and a bond bear market, which began in the summer of 2020. Thus far, the 2020s are looking very different from the 2010s”.

The managers have shifted the portfolio away from risk assets to “ complementary asset classes that may offset falls in equity markets”. They’ve also reduced exposure to the US dollar “as investors increasingly question the dollar’s position as the world’s reserve currency”. Instead, Personal Assets has been adding to its yen holdings. Index-linked bonds play a key part of the wealth-protection strategy for Capital Gearing and Personal Assets. “We consider that the role inflation-linked bonds play in a fiat monetary system is the same as the role gold played under the gold standard – that is to say, the closest asset class to risk-free,” says Laing.

Charlie Morris, the founder and chairman of ByteTree, argues that investors should go one step further. “Hold bitcoin for return as it catches up with gold as a reserve asset, and gold as a hedge. I believe the risk-weighted combination of the two assets is the optimal approach for asset allocators. In my opinion, gold is the reserve asset for the real world, and bitcoin is the reserve asset for the internet.”

Having a small amount of bitcoin in a portfolio has been a sensible decision for the past few years. It illustrates why it’s reasonable to consider a range of assets across a portfolio. Multi-asset trusts can take some of the effort out of this decision-making process. Not all investors will be comfortable with this approach, but it’s worth considering. The goal of a multi-asset portfolio is to reduce risk and volatility via diversification and enhance long-term returns.

“The pain of losses [outweighs] the joy of profits, which can lead to poor investment decisions,” says Laing. “By investing to avoid significant drawdowns, investors can protect their portfolio against their poor, emotion-driven decisions.”

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The investment-trust structure was conceived in the mid-1800s to fill a gap in the market for a low-cost, mass-market investment vehicle. One of the first was Foreign & Colonial, founded by City of London financier Philip Rose. The entrepreneur had a revolutionary goal: to provide the “investor of moderate means the same advantages as the large capitalist”.

In the 1800s, investing was largely the preserve of the wealthy, with limited options available to the smaller investor. Foreign & Colonial pooled investors’ money and invested it in a diversified portfolio, spreading risk across a basket of assets.

The closed-ended structure, which provided a stable pool of long-term capital, made these investment companies ideal vehicles for financing the expansion of the British Empire and the rapid industrialisation of the Americas. As global investment markets grew and diversified, the range of investment options available to investors with investment trusts expanded, and the range of trusts available also expanded.

Investment trusts have a fixed capital base

Investment trusts are structured as companies. They issue a set number of shares at the time of their flotation, and this forms a fixed capital base. Investors are then free to buy and sell the shares on an exchange. As the shares are freely traded and the asset base is fixed, trusts can trade at a premium or a discount to their underlying net asset value (NAV).

Open-ended vehicles, such as exchange-traded funds (ETFs), unit trusts and open-ended investment companies (Oeics) issue or eliminate excess shares at the end of each day to ensure the NAV and the share price match. This means there’s no room for a discount or premium to emerge.

This also means the capital base can shrink dramatically if the number of sellers consistently exceeds the number of buyers (and the price of shares in the fund falls). As the capital base shrinks, the vehicle has to continue selling assets to fund investment outflows. If those assets are challenging to sell, this can lead to a liquidity crunch. That’s why investment trusts tend to be the best vehicle for holding illiquid assets. They have no obligation to sell the assets, no matter how wide the discount to underlying NAV may become.

Some of the biggest trusts in illiquid sectors are the infrastructure trusts 3i Infrastructure (LSE: 3IN), Greencoat UK Wind (LSE: UKW) and the Renewables Infrastructure Group (LSE: TRIG). All of these trusts own portfolios of illiquid infrastructure assets, which generate steady inflation-linked cash flows.

Infrastructure isn’t the only asset class that lends itself well to the investment-trust structure. Trusts are ideally suited to owning portfolios of mixed assets, such as bonds, gold and stakes in hedge funds or private-equity investment funds. BH Macro (LSE: BHMU) has a position in the global macro hedge fund Brevan Howard, giving investors access to a fund that would otherwise be unavailable.

HarbourVest Global Private Equity (LSE: HVPE) is just one investment trust in the private-equity sector, offering investors exposure to this asset class via the trust structure. RIT Capital (LSE: RIT) and Caledonia (LSE: CLDN) are two examples of trusts making the most of the flexibility offered by the structure. Both are majority-owned by their founding families and own a broad portfolio of assets, from private-equity holdings to direct investments in other companies and portfolios of equities.

The structure of the investment trust also lends itself well to borrowing money. Investment trusts that specialise in acquiring illiquid assets – such as wind farms, property and infrastructure assets – can borrow against those assets to increase growth and build the asset base. These companies can also borrow to invest in equities. Borrowing money to invest in shares can be risky, but trusts can often mitigate some of the risk by issuing long-term fixed bonds.

For example, Scottish American (LSE: SAIN) issued £95 million of long-term debt between 2021 and 2022 with a blended interest rate of under 3%, maturing between 2036 and 2049. The trust, which owns a portfolio of equities, as well as property and infrastructure via other investment trusts, used the cash to reinvest into the portfolio.

The ability to borrow money is particularly helpful for the real-estate investment trust (Reit) segment of the market. Reits are a version of the typical investment trust, but with tax benefits when the majority of the portfolio is deployed into property. Companies like Supermarket Income (LSE: SUPR) and PHP (LSE: PHP) have leveraged this structure to build property portfolios designed around supermarkets and healthcare facilities, respectively.

MoneyWeek has always preferred investment trusts to open-ended funds for the above reasons – and the fact that they have historically outperformed other actively managed, open-ended funds. However, this has started to change in recent years. Investment trusts, particularly in equities, have struggled to keep up with the performance of other funds. As a result, investors have drifted away, and discounts to NAVs have risen sharply.

But there’s still a place for trusts within investors’ portfolios. Thanks to the structure of trusts, they are invaluable to build exposure to specific themes such as small caps, emerging markets, property and infrastructure. There are virtually no mass-market alternatives to the infrastructure offering, and trusts such as BH Macro, RIT and Capital Gearing (LSE: CGT) offer the sort of portfolio diversification that just can’t be found elsewhere.

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Gilt yields are on the rise once again, causing a fresh headache for Labour’s embattled chancellor of the exchequer, Rachel Reeves.

Yields on 10-year UK government gilts rose above 4.8% this morning (3 September), pushing up the cost of government borrowing. The yield on 30-year gilts has risen to over 5.7%, its highest level since 1997.

“The problem facing the UK is that the further bonds continue to climb, the larger the government’s costs are to finance the public debt,” said Matthew Ryan, head of market strategy at Ebury.

To bridge the gap, Reeves may be forced to hike taxes higher in the Autumn Budget. This, says Ryan, risks “a deadly ‘doom loop’” of escalating taxes, subdued growth and ever-increasing government deficits that “could completely derail Britain’s economy”.

“We’re not there just yet, but all eyes will be on how chancellor Reeves and her team intend to proceed," Ryan added.

The rise in borrowing costs risks boxing Reeves in further given her self-imposed fiscal rules. The government is seemingly in a position where cutting expenditure will be nearly impossible, but raising additional revenue risks hurting economic growth or breaking manifesto promises that Labour made during last year’s election.

What are gilt yields, and why are they rising?

Gilts are bonds (debt) issued by the British government. Like all bonds, the income they pay is expressed as a percentage of their purchase price. This is referred to as the yield.

Yields and prices move in opposite directions, because the income they pay is fixed in nominal terms. So when gilt yields rise, it means the price of UK government bonds is falling. That makes borrowing money more expensive for the government.

“Gilt yields are an expression of bond markets’ confidence in the UK government,” said Emma Moriarty, portfolio manager at CG Asset Management. While international factors such as the weakening global economy as a result of Trump’s tariff policy have played a part, “the reality is that the government came out of the last budget round with wafer thin fiscal headroom”.

“Bond vigilantes appear particularly critical of what may be perceived as fiscal mismanagement from the government,” said Ryan, from Ebury. “The massive shortfall between spending and income [is] almost certain to force further tax hikes in the autumn.”

There are other factors behind the spike in gilt yields. Fred Repton, senior portfolio manager on the global fixed income team at Neuberger, highlights that 2 September marked the end of the summer holiday season for US investors following the long Labor Day weekend.

“There was a notable pick-up in new issuance in bond markets that may have surprised bond market participants slightly,” said Repton. “In fact, yesterday was the largest issuance day on record in Europe as a whole.” This surge in supply has clearly dented prices, but Repton cautions that “one should not draw too many conclusions from one extremely active day for issuance".

When is the Autumn Budget?

Reeves announced this morning that the 2025 Autumn Budget will be announced on 26 November.

“We must bring inflation and borrowing costs down by keeping a tight grip on day to day spending through our non-negotiable fiscal rules,” Reeves said in a video announcing the date.

The primary mandate within these fiscal rules is a government commitment to financing day-to-day spending through revenue alone, and only borrowing to invest, by 2029/30.

Rising gilt yields make this harder, because they increase the costs of servicing the debt that the government has already accrued. There is also an implicit need for the government to keep borrowing to finance day-to-day spending between now and the end of the target period, and higher borrowing costs will increase the costs of servicing this debt.

Unless there is an unexpected surge in UK GDP, that means Reeves will either be forced to cut spending or to raise more tax revenue in the Autumn Budget. Either approach will be politically fraught.

“The very public U-turn on proposed cuts to welfare spending showed that, despite the deteriorating fiscal situation, there is still no effective majority for cutting expenditure,” said Moriarty. But Labour promised during its election campaign last year not to raise taxes on “working people”, effectively ruling out any changes to income tax, employees’ National Insurance or VAT.

“Proposals to shore up the fiscal position have been centred on raising taxes in a way which won’t hit working people,” says Moriarty. “There is a real fear that these proposals – for example, a wealth tax – disincentivise economic activity for uncertain impact on revenues.”

How do rising gilt yields affect your money?

The UK government is regarded as one of the most reliable borrowers in the world – as are the governments of most developed nations. The UK has never defaulted on its debt, and there is an argument that it never would (the Bank of England would likely intervene to prevent a default ever occurring, though this would cause its own problems as it would increase inflation).

Gilt yields are therefore seen as the gold standard within the bond market and other bonds tend to be priced in relation to gilts.

Mortgage rates, for example, tend to be linked to gilt yields. Long-duration mortgages are typically tied to 30-year gilts, yields on which are the highest they have been since the turn of the millennium.

Despite a turbulent global landscape in 2025, equity markets have remained resilient, a reminder of how well good businesses often respond to shocks and challenges. And it’s not just world events they’re having to cope with. Persistently high bond yields are raising the bar for equity investors.

When returns on cash in the bank and relatively safe bonds are high, it suppresses their appetite for stocks.

In an environment of uncertainty like this, you need to focus more than ever on quality companies, valuation discipline and portfolio diversification. The Goshawk Global Balanced Fund UCITS ETF (LSE: ROE) delivers on these fronts. Below are three holdings that illustrate the diverse opportunities in global equities.

Three global equities for your portfolio

Mitsubishi Electric (Tokyo: 6503) has long been a sprawling Japanese conglomerate, but recent years have seen rapid progress in corporate governance, aligning with government reforms. The company is implementing a return-on-invested-capital strategy to improve profitability. This has led to restructuring initiatives – such as spinning off the vehicle-electrification unit – to focus on higher-margin operations such as factory automation and air conditioning (vital for data centres).

In addition, its growing defence business, with advanced radar technology, adds another growth pillar. Not only is this company reasonably cheap on traditional metrics, but it also comes with huge balance-sheet value. The latter is key to traditional value investing and our analysis sees the stock trading well below the cost of rebuilding its various franchises.

One of the great opportunities that this market is throwing up is a set of companies that have demonstrated quality and compounding cash flows over many years. In the recent momentum and growth market, a number of these stocks have been left behind.

Thermo Fisher (NYSE: TMO) is one of these. It stands out as a leader in analytical instruments and services for clinical research, diagnostics, and environmental monitoring. Clients include pharmaceutical companies, research institutions and government agencies. From 2013 to 2023 it delivered annual free cash flow growth of approximately 15%.

Growth has moderated following the pandemic, while recent policy headwinds in research funding have reinforced the trend. This has been especially acute in the Trump presidency. Rather than rely on acquisitions, management has remained focused on improving the core business and growth rate. Last year, the company reaffirmed its expectation of long-term organic revenue growth guidance of 7%–9%. Combined with the target of robust cash generation, this supports the thesis that Thermo Fisher remains undervalued relative to its track record.

Seeking global stability and growth at reasonable prices has encouraged us to build a long-term position in Singapore Telecommunications (Singapore: Z74). The company excels at redeploying the strong cash flow it generates at home into higher-growth international markets, notably via Bharti Airtel in India, as well as holdings in Australia, the Philippines, Indonesia and Thailand. Indian mobile telephony is benefiting from easing competition, driving improved free cash flow.

In addition, 5G adoption and data centre investments underpin further expansion for the group. Singapore Telecommunications has also been adept at selling non-core assets to fund new growth and enhance shareholders’ returns. The current 4.7% dividend yield is well supported and highlights continued commitment to payouts.

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The last 50 years have been kind to investors in real terms. Everything made money: equities, bonds, property and gold. All investors had to remember was not to buy high and sell low. But that hasn’t always been the case. According to Barclays, UK equity prices were flat in inflation-adjusted terms in the 50 years to 1976. They doubled in the US, but that meant an annual gain of just 1.4%. Investors needed to reinvest their highly taxed dividends to grow their capital in real terms, but even so, the total return from UK equities for the 15 years to 1976 was zero.

Gilts fared even worse. An investor starting in 1926 had lost over 90% of their capital in real terms by 1976. Even with gross income reinvested, they had lost 75% of their money – and, of course, the reinvestment of gross income was not available to individuals. Holders of US Treasuries did better in the 50 years to 1976; they lost a mere 75% of their capital.

Anyone who squirrelled away gold started off well. The dollar value rose 70% in 1933 when Roosevelt devalued the dollar, having required all private holders of gold in the US to surrender it at the old price. The price was then fixed at $35 an ounce until 1971.

Property was a better investment. The price of the average house in the UK multiplied nearly 20-fold between 1926 and 1976 to about £12,000. But strict rent controls dating from the First World War ruled out buy-to-let for all but the most unscrupulous landlords. For British residents, investing outside the UK was academic. Strict exchange controls, introduced in 1947, made it legally impossible to buy overseas equities, bonds or property, or to own gold without paying a huge but volatile “dollar premium”.

The last 50 years have been much kinder to investors, but there have been plenty of traps for the unwary. The abolition of exchange controls in 1979, globalisation and the opening up of new markets, and novel strategies have increased the opportunity for UK investors to make fools of themselves. Information is much more readily available, but it doesn’t necessarily lead to better decisions. It’s as easy to be carried along by the herd as ever. Consider the following examples.

Investment #1: gold

The price rose from $35 an ounce to a peak of $850 in 1980, driven ever higher by the prognostications of the Aden sisters, who had relocated to Costa Rica so that their Delphic prophecies would not be interrupted by contact with the real world. The price then fell to $300 in 1999 as high real interest rates and falling inflation rendered “the barbarous relic” unattractive.

At this stage, Gordon Brown, Britain’s chancellor, decided to sell half of Britain’s gold reserves. The 395 tonnes raised $3.5bn against a current value of $46bn. Even at the time, this sale was recognised as a contrarian “buy” signal. Since then, the price has risen at a compound yearly rate of 10%.

Investment #2: Japan

The Nikkei index reached nearly 40,000 in 1989, when it represented more than half of the MSCI World Index. In a parallel property boom, land prices increased 50-fold between 1956 and 1986, reaching $139,000 per square foot in Tokyo. It was calculated that the Imperial Palace in Tokyo was worth as much as the whole of California.

The booming stock market was driven not by earnings but, it was said, by Japanese housewives and gullible foreigners. Japanese companies had very little in the way of earnings and rarely paid dividends, financing investment through the sale of warrants and convertible bonds with derisory yields. Western pundits sought to rationalise this on the basis that Japan’s economic miracle would go on forever.

The market then halved in barely two years but only reached a low in 2009, 80% below the peak. Many investors invested prematurely for a turnaround, but recoveries soon petered out. A sustained recovery started in 2012, and the Nikkei index only passed its old peak in 2024.

Investment #3: the dotcom bubble

Stock markets soared in the late 1990s on the back of the technology sector, but the media, telecoms and biotechnology industries were also caught up in the excitement. Share prices ran way ahead of earnings. As Ed Yardeni of Yardeni Research points out, the technology and communications sector came to comprise 41% of the S&P 500 in early 2000 but only 24% of earnings. Moreover, these earnings proved largely unsustainable, so by 2003 the figures had fallen to 18% and 13% respectively.

Within three years of their 2000 peaks, the S&P 500 and the FTSE 100 indices had nearly halved. The FTSE 100 didn’t reach a new peak until 2017, but the S&P 500 achieved it 10 years earlier in 2007, thanks to the rebound of the technology sector. Technology and communications now account for 43% of the S&P 500 but 38% of prospective earnings, while in the UK, the technology, media and telecommunications (TMT) sectors have never recovered.

In 2003, shares such as Amazon and Microsoft could have been bought at bargain prices, giving rise to a revisionist view that the TMT bubble was the dawn of a new age rather than a blind alley. But many of the shares that drove the market higher then have either disappeared or are a shadow of their former selves.

The list of forgotten firms from that era that were once in the FTSE 100 is long, including Freeserve, Thus, Colt Telecom, Baltimore Technologies, CMG, Psion, Kingston Communications and Bookham. ARM has since re-emerged stronger than ever, while Autonomy was controversially bought by Hewlett Packard. FTSE 100 veterans Cable & Wireless and GEC were destroyed by poor acquisitions.

Lastminute.com was founded in 1998 as an online bucket shop for unsold package holidays and hotel rooms. When it was floated in London in March 2000 by Brent Hoberman and Martha Lane Fox it was valued at £570 million, and the valuation soon peaked at £770 million. It was sold in 2014 for £76 million and lingers on.

Investment #4: Woodford Patient Capital Trust

Neil Woodford built a reputation at Invesco managing unit and investment trusts offering generous income. Investing for income became popular after the collapse of the TMT bubble. Income can either be reinvested for good long-term returns or taken out, but not both. This is not always clear in the marketing.

Chafing at the constraints put on him by Invesco, Woodford left in 2014 to found his own business. He started an equity income fund which, at its peak, managed over £10 billion and, in 2015, launched an investment trust, Patient Capital. Initially, £200 million was targeted but this was soon increased to £800 million. The so-called independent directors were associates of Woodford, and the trust was to invest not just in income-generating larger companies but also in high-risk smaller and unquoted companies, mostly technology or biotechnology related.

This was an area of the market in which he had, in the past, dabbled without success. His investment process was akin to throwing mud at the wall in the hope that some of it would stick. Such investments also made their way into the equity income fund but poor performance led to mass withdrawals and a crisis in the remaining rump of illiquid investments.

Investment #5: Global Absolute Return Strategies

The idea behind GARS, launched in the wake of the 2008 financial crisis, was to offer investors hedge fund-like performance at much lower fees and with better liquidity. The fund, managed by Standard Life, offered the prospect of returns of 5% above cash over rolling three-year periods through a multi-asset portfolio of investment and trading ideas from the supposedly clever people at Standard Life.

Good initial performance led to a flood of inflows from pension funds and other investors seeking a quiet life but with great returns. GARS peaked at £53 billion under management in 2014 but copycat funds at Aviva, Invesco and Investec (now rebranded as Ninety One) made the overall pool much larger.

With too much money chasing too few opportunities, performance soon flagged, then turned negative and investors exited. Even so-called “macro” hedge funds hit hard times. With assets down to just £1.3 billion, GARS was shut down in 2023. The idea that second-rate fund managers could make great risk-adjusted returns on huge pots of money from staring at Bloomberg screens was always idiotic.

Investment #6: bonds

The bull market in government bonds started in the inflation-ravaged late 1970s and early 1980s and lasted more than 40 years. At its peak in 2020, 10-year gilts were yielding just 0.25% and 10-year US Treasuries 0.68%, well below the inflation target rate of 2%. Merrill Lynch had calculated in 2016 that interest rates were at their lowest for 5,000 years, but Covid drove them even lower.

Bond yields followed, with the UK repaying its undated 3½% War Loan in 2015 before yields plunged further. In 2021, the Financial Times calculated that “bonds worth $15 trillion, more than a fifth of all debt issued by governments and companies around the world” were trading at negative yields. This was surely the biggest bubble of all time.

Many of the UK’s defined-benefit pension fund managers, chasing the illusion of “liability-driven investment”, were not only heavily invested in government bonds but had bought on margin (ie, borrowed to buy more) to increase their exposure. When rising inflation started to push bond yields higher, they became forced sellers, forcing yields higher still. The FT, using data from the Pension Regulator, estimated that pension funds lost £425 billion in 2022 while other estimates exceed £500 billion. No wonder they have insufficient money to invest in British businesses or infrastructure.

Normally, the managers responsible would have been fired, never allowed to work in financial services again and possibly jailed. Fortunately for them, blame for the fiasco was deflected by the political and media establishment onto the government of Liz Truss – as if gilts would still be yielding 0.25% without her ill-timed budget.

Investment #7: bitcoin

The cryptocurrency market is estimated at $3 trillion, and many believe this constitutes a massive bubble ready to implode. However, law-abiding people in law-abiding countries without exchange controls will never appreciate the attraction of cryptocurrencies. Legitimate investors are just the tip of the iceberg, accounting for less than 10% of the market.

They have done well by defying responsible advice but should beware any sign of an end to the war in Ukraine, as Russia pays its troops in bitcoin. This can be accessed anywhere in the world by survivors or next of kin, so rising prices keep them fighting. This makes bitcoin the world’s most unethical investment.

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Following a trip in May to a US investment conference to meet with company bosses, James Harries, the manager of STS Global Trust, reported that, “as ever one cannot fail to be impressed by the sheer scale, dynamism and competitive zeal of US corporates and the wider economy. There was widespread angst relating to tariffs, the unpredictability of policymaking and the stress on the consumer, but this had yet to show up in end demand.” Perhaps most remarkably, “not one company mentioned the word ‘Trump’”. At the time, it seemed that business leaders, fund managers and pundits in the UK were talking about little else. The consensus that had prevailed at least since his inauguration, if not well before, that Trump was mad, bad and dangerous, is being slowly transformed into a more measured analysis.

Jonathan Sumption, a former senior judge on the UK’s Supreme Court, remains firmly in the critics’ camp. He has warned that Trump’s bullying tactics, intolerance of even mild dissent, readiness to use presidential prerogative to drive through his agenda and vocal threats to those who stand in his way bear all the marks of an aspiring dictator. The checks and balances of the US constitution, with its division of power between the executive, Congress and the Supreme Court, and between federal, state and local government, has been steadily undermined, says Sumption. The muted opposition to all his proposals must mean that opponents and sceptics have been cowered into submission – that Trump has captured the Republican Party and has made himself unaccountable. The approval of presidential appointments, including cabinet positions, is just a rubber-stamping exercise.

Donald Trump is not Adolf Hitler

This view is echoed by Filipe Campante and Ray Fisman, writing for Bloomberg. “The second Trump administration has undertaken a sweeping expansion of presidential power,” they write. “The White House is attempting to usurp some of Congress’s spending powers and to reclassify civil servants so as to make them easier for the president to fire. He deployed the National Guard on California over the governor’s objections under the auspices of responding to a rebellion.” Campante and Fisman argue that the power of the courts is being challenged, students detained and universities bullied into submission. “The system that is currently under threat has endured periods of remarkable stress but democracy survived and thrived by responding to these challenges. This track record led to an understandable and almost unshakable belief that American democracy was unassailable.”

Now, however, the two-party system has turned from being a barrier to extremism (as voters converge to the centre) into a trap, say Campante and Fisman. “If extremist or anti-democratic forces somehow manage to capture one of the two major parties, the system would switch from being a barrier to extremism into an accelerant. Helped by the rise in partisanship, which keeps voters loyal, Trump and his loyal proxies can credibly threaten every Republican elected official with the destruction of their political career.”

Niall Ferguson, the author and historian, takes a very different view. “People on this side of the Atlantic don’t remotely understand him,” he says. “He is not Mussolini, much less Hitler. It is enormously stupid to compare Berlin in the 1930s, when everyone was in uniform, militarism was rife and lawlessness everywhere, with America now. Trump is recognisably in the American tradition of populism, with tariff policy deeply rooted in the late-19th-century politics of president William McKinley.”

As for the idea that the US is teetering on the brink of authoritarianism, forget it: Trump’s use of executive orders is comparable with that of F.D. Roosevelt in 1933. Trump owes a large debt to Richard Nixon, who first took him seriously as a political figure. Nixon shocked the world in 1972 by meeting Mao Tse-tung, severing the dollar’s link to gold a month later, and by introducing a general 10% tariff.

Ferguson also compares Trump to Reagan in his restoration of military deterrence and the use of surgical strikes. “It reminds people of the superiority of the US military” and that “will have shocked Putin”. The bombing of Iran showed that Russian air defences are useless. German rearmament – precipitated by vice-president J.D. Vance telling Europe that if it doesn’t do something about its defence, Nato was over – is also a disaster for Putin. “Russian attacks on civilians are a sign of desperation as it can’t hit military targets. Putin has overplayed his hand and a war of attrition is unsustainable.”

These developments also make confronting the US a worse idea for China than it was just a few weeks ago, says Ferguson. A Taiwan crisis is still a strong probability, but Xi Jinping “is not a well man and doesn’t have long”. Trump’s successor may not be as amenable to a deal as Trump is, so “the stand-off will reach a culmination in the next three years”. Ferguson believes that China is more likely to blockade Taiwan than invade. After all, “when did the PLA last fight”? “Ukraine would be the last place in the world where I would want to get into a pub fight,” he says. “Taiwan would be my first choice.”

Trump’s tariff masterstroke

As for Trump’s widely derided tariffs, Torsten Slok, chief economist at Apollo Global Management, wonders if Trump hasn’t outsmarted the world with his tariff plan by keeping tariffs below his threatened rates to ease uncertainty while still producing $400 billion of annual revenue for US taxpayers. “This would seem like a victory to the world; trade partners will be happy with tariffs of only 10%.”

Dr Pippa Malmgren, a former US presidential adviser, gives Trump a mark of nine out of 10 for how well he’s doing. “His electoral base loves the changing of the power structure around tariffs, the fact that its succeeding in compelling other governments to negotiate not just on trade but on a variety of other issues.” It might seem as though his attempt to control the budget deficit and hence government indebtedness is failing, with Elon Musk disillusioned about the administration’s failure to slash public spending. Malmgren, however, says that “getting spending under control, will take many decades but the commencement of the process has gone incredibly well. This means addressing the issues of why money is being spent, what it is being spent on and whether it should be. His base is also very happy with his decisiveness on illegal immigration.” This has increased 50% year on year in the UK; attempted crossings of the US-Mexico border have dropped by more than 90%.

Trump’s critics are expecting (or is it hoping for?) a US debt crisis, particularly after the extension of the temporary tax cuts enacted in 2017. In Argentina, Javier Milei’s drastic cutting of public spending has turned an unsustainable deficit into a primary surplus (before finance costs) and is now being rewarded with an economic boom. That was never possible in the US. But it is far too soon to say that Trump has given up on cutting government expenditure; a 10-year US Treasury yield below 4.4% does not suggest that the bond vigilantes are particularly worried. As Ludovic Subran, chief economist and investment officer of Allianz, says, “it’s quite impressive to see how much the market is pricing in the pragmatism of President Trump. A lot of the uncertainty that was really peaking in April and May is now fading away.” You may not like Trump personally, but he is proving effective and markets are responding.

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A five-year investment return of 25% looks miserable compared with the 71% return of the MSCI All Country World index, so why does Personal Assets Trust (LSE: PNL) have £1.6 billion of assets and trade at a negligible discount to net asset value (NAV)? The answer is that PNL – like Capital Gearing (LSE: CGT) and Ruffer Investment Company (LSE: RICA) – isn’t targeted at those who want to get rich through investment, but at those who want to stay rich.

“Our policy is to protect and increase (in that order) the value of shareholders’ funds per share over the long term” is the trust’s strapline. Risk-averse investors could certainly have done much worse over the past five years: the average return from investing in supposedly safe gilts has been -22%.

Holding government bonds alongside equities has been the standard way to smooth the performance of a portfolio. The classic ratio has been 60% equities to 40% bonds. This works well when stock and bond markets are inversely correlated – meaning that bonds generally perform strongly when equities are doing badly and vice-versa.

Yet this is no longer working well. The inverse correlation that lasted for over 30 years flipped in 2022. A classic passive 60/40 portfolio would have become increasingly volatile, while returning a comparatively modest 34%.

Holding a fund such as PNL rather than gilts would have done a far better job in smoothing performance for a much lower sacrifice of returns: a combination of 60% equities and 40% PNL would have returned 53%. That is why it is included as part of the MoneyWeek model portfolio.

Personal Assets Trust has a cautious portfolio

PNL’s positioning is cautious. The portfolio, which is run by Sebastian Lyon and Charlotte Yonge of Troy Asset Management, has just 38% in equities, mostly in blue chips.

The top five stocks (out of 17 holdings) are Unilever (4.5% of the total portfolio), Alphabet, Visa, Diageo and Microsoft.

Meanwhile, 48% of the portfolio is invested in government bonds. Of this, 24% is US inflation-linked bonds, 8% is Japanese government bonds, 9% is short-dated gilts, 4% is UK inflation-linked bonds, and 3% is short-dated US Treasuries. The focus on short-dated and inflation-linked bonds suggests that Lyon and Yonge don’t believe that the rise in bond yields has ended.

The single largest position is gold bullion (currently 10.7%), but Lyon and Yonge are not paid-up members of the-end-of-the-world-is-nigh crowd. They have taken “material gains” on their holdings in gold over the last nine months and also point out that “the strong recovery in equity markets is a reminder [of] why transposing geopolitical predictions onto financial markets is challenging”.

Personal Assets Trust: discount control

Of course, steady returns from a strategy like this can be made more volatile for investors if an investment trust’s discount to NAV fluctuates. The discount might be expected to widen when equity markets were performing well and PNL was lagging badly, but narrow when it was at least preserving value in difficult markets.

To prevent this, PNL has a rigid discount control mechanism: buying back shares when there is excess supply, and issuing them when there is excess demand. This keeps the shares trading close to net asset value. In the year to 30 April, the trust bought back 26 million shares (6.2% of those in issue at the start of the year) and issued just 0.6 million.

PNL has returned 204% in share-price terms since Troy’s appointment in 2009, which is more than double the 90% increase in the retail price index. Taking more risk has paid off for investors over the past five years, hence its returns have lagged the market. Still, PNL’s time will come again – maybe not yet, but very likely within the next five years.

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There are not that many people still working in investment who can remember a time when Japanese government bond (JGB) yields did not trend inexorably down. They peaked in 1990, just after the bubble began bursting, and declined through most of the following 35 years.

For the entirety of my career, shorting JGBs has been known as the “widow-maker”. No matter how low yields went, they always found a way to fall further, wiping out anybody reckless enough to bet that the bottom had been reached.

This may be why the big upward moves in longer-dated JGBs over the past year have not drawn as much attention as you would expect. Anyone who has been conditioned to expect JGB yields to be low forever will instinctively doubt that it can last. This is a brief upheaval, and they will soon head right down again.

Yet, something fundamental seems to have shifted. The 30-year JGB currently yields 2.9%, comparable to the 30-year bund at 3.1%. It had ticked up to almost 3.2% before the Bank of Japan said it would reduce the pace at which it is stepping back from quantitative easing (QE), while the Ministry of Finance indicated it would issue less ultra-long-dated debt in future.

The implications of this are significant – not just for Japan but also for global markets, because low-yielding Japanese debt has been a key funding source for many global carry trades. Borrow at low rates in one currency, invest in higher-yielding assets in another, pick up the difference in returns and hope you can unwind the trade before something – eg, typically a massive currency move – leaves you with sudden losses.

Long-dated JGBs signal uncertainty everywhere

Still, the higher yields on long-dated JGBs don’t imply that Japanese monetary policy is going to normalise any time soon. Markets are pricing in a very drawn-out adjustment – while the 30-year JGB and the 30-year bund are now in line, five-year yields are still well over a percentage point apart (0.97% vs 2.18%). This long-term distortion in global markets may gradually unwind – which is likely to be bullish for the yen over the long term – but it’s not immediate, or so the market thinks. Whether this may be too sanguine is another matter: if inflation (3.5% in May) remains high, rates should go up faster.

Instead, what long-dated bonds are signalling in Japan and elsewhere is a huge amount of uncertainty. Take the US 30-year Treasury, which now yields 4.8%. This doesn’t seem to be due to fears of runaway inflation in particular, because the 30-year inflation-linked Treasury is yielding about 2.5% (ie, the rate of inflation needed for them to return the same is just 2.3%). Rather, it simply feels increasingly reckless to lock up capital for so long. Investors worry about increased government spending, the potential for large amounts of bond issuance to fund it, politics (at the time of writing, the UK 30-year gilt had ticked up to 5.4%) and much more. They are right to be worried, and current yields still feel like very meagre compensation for those risks.

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Investing has never been easier. The rise of investing apps means that the top stocks, funds and investment trusts are just the click of a button away for millions of potential investors.

But investing isn’t free in most cases. As well as the amount you want to invest, there’s more to pay thanks to the menu of fees involved when you buy or sell shares, funds or bonds. Crucially, these fees matter because what you pay can make a dent in any gains.

Antonia Medlicott, founder of investing and personal finance advice website Investing Insiders, said: “Investment platform fees can quietly eat into returns far more than many investors realise, especially over the long term. Fees can compound against you just as much as returns can compound in your favour, as a small annual charge today can add up to thousands of pounds over the life of an investment.”

Before you start investing with an investment platform, it’s important to understand the costs involved, how you might be able to minimise them and get value for money.

What are investment costs and how do they impact returns?

You pay a platform fee for stocks and shares ISAs, general investment accounts and self-invested personal pensions (SIPPs) which can be anything between 0.15% and 0.35%. This covers the costs the provider incurs through you using its services, such as holding your money, trading services and the research and analysis you get access to. Popular investment platforms include AJ Bell, Fidelity, Hargreaves Lansdown and Interactive Investor.

You’ll also pay for the individual funds you hold – as little as 0.05% for plain index trackers (such as the iShares UK Equity Index Fund) and around 0.75% for a typical actively-managed fund – though this can be less or more.

There are more fees to factor in for trades. Many platforms charge ‘trading’ or ‘dealing’ fees every time you buy or sell an investment. This is where costs can really mount for those who are active investors.

There are some trading platforms that let you trade for free. There will be platform fees however, and perhaps others to look out for. So don’t be swayed by free trades alone.

If you buy shares outside the UK, there will be fees to factor in for foreign exchange (FX). This charge is for converting your pounds into whatever currency the investment is traded in.

Another one to look out for is the government’s stamp duty reserve tax when you buy UK shares electronically. You’ll be charged 0.5% of the value of the shares you’re buying. It’s deducted at the same time you buy the shares so you don’t need to pay separately.

Research undertaken for investing platform IG’s Fat Cat Index, which quantifies the gap between the most expensive investment platforms in the market and the five best-value providers, found that more than half (52%) of UK investors are using the 12 most expensive stocks and shares ISA providers on the market, costing the average active investor around £515 in extra fees compared to a lower-cost alternative.

“Our recent Fat Cat Index showed that some UK investors are overpaying by as much as £922 per year on fees and charges,” said Michael Healy, managing director UK and Ireland at IG Group. “If you're unsure about your current provider, or thinking of opening your first account, always check the fees and understand the total cost of investing, including platform fees, FX charges and dealing costs.”

Don't miss our beginner's guide: how to start investing.

What investment costs can I expect?

With more and more investment and trading platforms to choose from today, platform fees and charges to buy funds and shares have come down significantly over the years.

For platforms, a lower fee option might be a no-frills style service with access to an investing account and less emphasis on customer service, research and analysis. These are designed for seasoned investors not looking for or in need of much support, perhaps.

You might pay a percentage of your savings held, or a subscription-style charge with some platforms where you pay a monthly fixed fee.

Costs will vary according to how much money you have invested, and how often you trade, as well as the platform you choose.

So the fixed subscription charge could be more cost effective if you like to trade actively compared to an investor who adopts more of a buy and hold strategy, or if you have a very large amount invested.

To decide which is likely to work out as better value, you’ll need to crunch some numbers.

To give you an idea of how charges can add up over the year, let’s say a portfolio is invested solely in funds with 10 trades of £100 per year.

According to calculations by Compare + Invest, a £25,000 ISA could cost between £48 and £131 in annual fees, depending on the provider.

For a bigger portfolio of £100,000, the fees can be between £50 and £450.

The difference is significant, but remember – cheapest isn’t always best. It’s what’s right for your particular needs.

How to reduce investment costs

You can cut the cost of investing by checking you’re paying the most competitive platform fees for the service you need. You can do this by using a comparison website such as Compare + Invest.

You can also reduce costs by choosing low-cost passive tracker funds over actively managed funds. But again, if you believe in the potential of active funds where skilled managers offer the potential to generate above-average investment returns that beat the market (and trackers) then you can still find well-priced active funds.

Some platforms offer ready-made fund ranges for investors who don’t have the time or inclination to select their own investments. Essentially they are a pre-selected bundle of funds wrapped up and ready to buy, usually according to differing levels of risk. You then pick the risk level you’re comfortable with.

However, you’ll pay a little bit extra for the convenience of having someone else do the hard work for you. If you really wanted to save money, you might make the time to do your own fund selection.

How much should I pay in investment fees?

There’s no right or wrong amount. It’s about getting value for money and having the service that’s right for you, even if that means paying a little more.

The best value platform for you will depend on what you want to invest in and how often you plan to trade (buy or sell) stocks or funds.

However, it’s worth making sure that you’re not paying more than you need to. If you haven’t reviewed your existing service for a number of years, you may be paying too much.

If you find that is indeed the case, switching is an option. To do this you need to open a new account – either an ISA, general investment account or SIPP – and fill in a transfer form with the existing provider that you want to leave.

If you do intend to switch, it’s worth investigating if there will be an exit penalty. The City watchdog, the Financial Conduct Authority (FCA) clamped down on this in recent years and so many providers cut their fees or scrapped them altogether. But they do exist. Some charge as a percentage of a portfolio and others charge per holding.

If you have a sizable amount invested – or many holdings – it’s important to understand the fees you’ll face by leaving.

We explain how to get a cashback bonus via pension and ISA transfer offers in a separate article.

What are the big firms’ investment fees?

We’ve analysed the big investment firms’ investment fees to give you an idea of what you can expect to pay.

We’ve looked at annual platform fees, trading/dealing fees, regular investing charges and FX fees across their stocks and shares ISAs.

You can also use an online ISA fee calculator, which will tell you how much you’re likely to pay in fees depending on the provider.

AJ Bell

AJ Bell’s annual platform fee if you hold shares is 0.25%, which is payable monthly (maximum £3.50 a month).

If you hold funds, you are charged 0.25% on a portfolio worth up to £250,000, 0.10% on the next £250,000 to £500,000 and nothing on a portfolio worth more than £500,000.

The shares dealing fee is £5, or £3.50 if you had 10 or more share deals in the previous month. The fund dealing fee is £1.50.

There is no regular investing fee. FX fees are capped at 0.75%.

Fidelity

Fidelity’s annual platform fee is 0.35% on a portfolio worth between £25,000 and £250,000, or if you have signed up to a regular savings plan. If your portfolio is worth less than £25,000, you pay a £7.50 per month fee.

Accounts with £250,000 or more invested are charged a platform fee of 0.2%.

Customers are charged £7.50 for each deal placed online or £1.50 per deal if you are signed up to a regular savings or withdrawals plan. There are no fees for buying or selling funds.

FX fees are tiered based on the amount you are dealing, capped at 0.75%.

Hargreaves Lansdown

Hargreaves Lansdown’s annual platform fee is up to 0.35%, which is charged monthly and based on the percentage of the value of your investments.

You are charged 0.35% on funds held worth up to £250,000. Above this threshold, the fee lowers on a sliding scale based on the value of your funds. No charge is applied on any funds over the £2 million threshold.

If you’re dealing in shares including ETFs, the annual platform fee is 0.35% (capped at £12.50 per month).

Customers pay a £6.95 dealing charge on shares that are bought or sold, which reduces to £3.95 if you’ve placed 20 or more trades the previous month. A charge of £1.95 applies to bought and sold funds.

It’s free to regularly invest with Hargreaves Lansdown while FX fees are capped at 1%.

Interactive Investor

Interactive Investor’s fees work slightly differently in that you sign up to a monthly plan. The Core plan costs £5.99 per month, the Plus plan is £14.99 per month and the Premium plan is £39.99 a month.

Under the Core plan, you have a portfolio value limit of £100,000, it costs £3.99 to buy and sell funds and shares, and there’s no fee for regular investing. FX fees are capped at 0.75%.

Vanguard

Vanguard has different annual platform fees depending on whether the account is self-managed or managed.

If you have a balance under £32,000, there is a £4 a month fee for a self-managed account. Managed accounts are charged 0.15% of the total value of any investments.

For balances of £32,000 and over, there is a 0.15% fee (maximum £350 a year) for both self-managed and managed accounts.

There is also an additional fund management charge of 0.06% to 0.79% for self-managed accounts, depending on the funds you pick. For managed accounts, the average fee is 0.17%, according to Fidelity.

You are also charged up to 0.26% when trading ETFs. You aren’t charged for trades of Vanguard funds.

Inheritance tax rule changes that mean pensions will be included in calculations from 2027 could leave the loved ones of as many as six times more over 55s liable to pay, according to new analysis.

Wealth manager Quilter reviewed the portfolios of its thousands of clients since it was announced in the Autumn Budget 2024 that pensions will be brought into scope of inheritance tax (IHT) in two years’ time.

It found the families of one in five clients aged over the age of 55 could be subject to an inheritance tax liability from April 2027 – a six-fold increase on current levels.

Advisers have started recommending onshore bonds, as well as trusts, as legitimate ways for clients to avoid inheritance tax.

The findings are based on the wealth manager’s platform data, which factors in pension assets alongside other holdings and half the value of the client’s assumed property wealth, estimated using average regional house prices.

The analysis underlines how, once pensions are included, even previously relatively modest estates will breach the frozen £500,000 IHT threshold, made up of the £325,000 main nil rate band and the £175,000 main residence nil rate band.

Roddy Munro, head of technical sales at Quilter, said: “The scale of change we’re facing is monumental. Tax allowances have been repeatedly slashed, and from 2027, the inclusion of pensions in IHT calculations will shift the dial even further.

“Our traditional approach to financial planning must evolve as clients find themselves with wealth trapped in wrappers that no longer offer the same tax protection.”

Financial planning advice has changed

The recent inheritance tax rule changes add to a tightening tax landscape for savers and investors, especially those looking for ways to lower their IHT bill.

Frozen and reduced allowances for capital gains tax, dividends, and the pension commencement lump sum (25% tax-free cash) have reduced the effectiveness of traditional financial planning built around ISAs, General Investment Accounts, and pensions that has shaped financial advice for the past 15 years.

For those with significant wealth in these products – many of whom are older individuals approaching or in retirement – the core of financial planning must evolve.

This shift is already influencing adviser strategies, according to Quilter, with bonds and trusts becoming more popular. Bonds provide tax deferral and control, while trusts enable clients to ring-fence assets outside their estate for IHT purposes and manage succession plans.

Quilter’s internal data found recommendations for onshore bonds from financial advisers has nearly tripled since the October 2024 Budget.

Munro said: “Gifting out of excess income [to reduce IHT liability] often falls short, especially when investment performance replenishes what’s been given away. This is where the strategic use of bonds and trusts comes into its own. When used correctly, they can become the foundation for intergenerational wealth transfer in this new era.

“Bonds and trusts will play a far more important role in estate planning in the years ahead,” he said.

Using onshore bonds and trusts to avoid inheritance tax

When you place an onshore bond into a discretionary trust, you're making a gift that begins to move the value of that investment outside your estate. Provided you live for seven years after the gift is made, it typically won’t count towards your inheritance tax bill.

In the meantime, the bond continues to grow within a tax-efficient wrapper.

Onshore bonds are also taxed differently from other investments and are sometimes referred to as a non-income producing or capital asset.

Shaun Moore, chartered financial planner at Quilter, explained: “Rather than the bondholder paying tax on income and gains directly, the bond provider (the life insurance company) pays tax at a maximum rate of 20% on income and gains on the assets linked to the bond, as they arise.

“This means there is usually no further tax to pay by the bondholder while the bond is growing.”

The bondholder is taxable should a chargeable event occur. This is generally when money is removed from the bond, such as a full surrender or a large withdrawal. Even then, additional tax is only due if the person liable is a higher or additional rate taxpayer.

This can make ongoing administration simpler, particularly for trustees who are liable for trustee rate of tax, as there is no need to report annual income or gains on the linked assets to HMRC.

One of the big advantages of this structure is the control it offers, said Moore.

“The trust allows you to appoint trustees, often family members or professionals, who can decide how and when money is paid out to beneficiaries such as children or grandchildren.

“This makes it a good option if you are not comfortable giving large sums away outright but still want to reduce the size of your taxable estate.”

That said, trusts come with their own tax rules and responsibilities. There may be charges when setting them up, and if the amount placed in trust exceeds your available inheritance tax allowance, there could be an immediate inheritance tax charge.

Trusts may also be subject to ten-yearly and exit charges, so it is important to understand the long-term implications.

Moore said: “These structures are not suitable for everyone, but when used appropriately, they can be a powerful part of a broader estate planning strategy. Anyone considering this route should speak to a financial adviser to ensure it is the right fit for their circumstances and that everything is structured correctly from the outset.”

UK gilt yields summary

• UK borrowing costs have surged to the highest level since the global financial crisis.
• Some are blaming the Autumn Budget for the rise in yields, but borrowing costs are also rising in the US in response to heightened concerns about inflation.
• Strong US jobs data pushed gilt yields higher before surprise inflation dip reversed the trend.

Scroll for analysis from the team at MoneyWeek.

Good morning, and welcome to MoneyWeek’s live blog covering today’s big financial news: the spike in gilt yields that threatens to upend chancellor Rachel Reeves’ Autumn Budget just months after it was announced.

Dan McEvoy and Katie Williams here to take you through the news as it develops.

The background

Gilt yields – effectively, the interest rate the UK government pays on its debt – have skyrocketed over the last two days to their highest level since the financial crisis.

This puts chancellor Rachel Reeves in a tight spot. Her Autumn Budget – barely two months old – risks unravelling as the costs of servicing UK government debt soar.

Shadow chancellor Mel Stride has called Reeves to address the House of Commons on the crisis this morning. However, at the time of writing, it looks as though Reeves is pressing ahead with a planned trade visit to China instead.

Why are gilt yields rising?

Unsurprisingly, politicians have traded barbs over who is to blame for the increase in gilt yields in Parliament this morning.

Conservative MPs blamed Reeves’ Budget for spooking bond markets, while Labour MPs have attempted to push the blame back onto the previous Conservative government for running up the “black hole” that forced Reeves into tax rises.

Financial analysts also appear split on the matter.

Matthew Ryan, head of market strategy at Ebury, views the yields spike as “a damning indictment of Labour’s fiscal policies”. Ryan singles out the increase to employer NI contributions “which businesses have already warned will lead to higher prices and a worsening in labour market conditions”.

Laith Khalaf, on the other hand, points to the fact that bond yields have been rising in the US and the UK over recent months, and thinks that this week’s spike is more due to the potential impact of Donald Trump’s incoming presidency.

“The fact yields are rising on both sides of the Atlantic does suggest the new year has brought with it a focus on the incoming US president, and the potential for his trade and immigration policies to be inflationary,” says Khalaf.

Mike Riddell, portfolio manager, Fidelity International, seems to agree: “A common conclusion is to point fingers at the government. But this would miss the point; it is mainly a global fixed income story. UK gilt yields are broadly moving with US Treasuries.” He also points to similar moves in long-dated German government bonds over the past month.

Treasury response

A spokesperson for HMT responded to MoneyWeek with the following statement:

“No one should be under any doubt that meeting the fiscal rules is non-negotiable and the Government will have an iron grip on the public finances.

"UK debt is the second lowest in the G7 and only the OBR’s forecast can accurately predict how much headroom the government has – anything else is pure speculation.

“Kick-starting economic growth is the number one mission of this Government as we deliver on our Plan for Change. Over the coming weeks and months, the Chancellor will leave no stone unturned in her determination to deliver economic growth and fight for working people.”

The Treasury also iterated that “the current budget deficit is forecast to be £55.5 billion in 2024-25. From then, it improves in every year until 2027-28 when the current budget is in surplus”.

The spokesperson said that Reeves will “deliver a speech in the coming weeks on the Government’s economic strategy and plan for growth”, but did not respond to a question on whether or not she will address Parliament on the matter today. This appears unlikely given her scheduled trip to China.

Taxes to increase?

The fear is that increased borrowing costs will force the government either to raise taxes, or to cut back on public spending in response, having just raised taxes in the Autumn Budget in order to cover the so-called fiscal black hole.

“Higher yields put pressure on government finances and increase the risk that Reeves will come back with another tax raising Budget,” says Khalaf.

Over the long term this could impact the UK’s growth prospects.

“Weak demand for UK debt raises the risk of either government spending cuts or further tax hikes to balance the country’s finances, neither of which would be positive for growth,” says Ryan.

An opportunity for bond investors?

Is the latest spike in yields good or bad for bond investors? It largely depends on whether you are an existing bondholder or someone eyeing up new opportunities in the market.

Bond yields and bond prices have an inverse relationship, so when one rises, the other falls. Investors have been selling UK government bonds recently in response to the latest risks, and this has pushed yields up.

Those with gilt investments will have experienced some recent losses as a result of the latest developments. “The typical gilt fund is down 2.5% in the last three months, while the typical pension lifestyling fund is down 4.4%,” according to Khalaf.

The flipside is that the yields spike is creating income opportunities. “Fresh bond investors might be licking their lips as yields rise and they are able to lock into higher rates,” Khalaf adds.

2022 all over again?

It doesn’t take a particularly long memory for today’s events to recall the last time rising gilt yields threw the UK government into chaos.

Liz Truss’s infamous ‘mini-budget’ of September 2022 sent gilt yields up 1.2% within days of its announcement. This ultimately forced Truss to resign.

“Today, the UK’s demons are back, driven by heightened fiscal concerns – evoking memories of Liz Truss’s chaotic 'mini-budget’ days,” says Ipek Ozkardeskaya, senior analyst at Swissquote Bank. “Back then, markets lost confidence in the government’s spending plans, triggering an aggressive selloff that forced the BoE to intervene.”

However, George Saravelos, global head of FX research at Deutsche Bank, thinks the two gilt yield crises are distinct from one another.

“The 2022 crisis was self-inflicted,” he says. “It was a UK-driven policy shock. The easiest way to see this is that gilt moves back then completely decoupled from other markets and idiosyncratically sold off.

“This time round, all gilts are doing is mirroring US treasuries. The most straightforward way to demonstrate this is that the 10-year UST - Gilt spread is moving sideways and is exactly where it was six months ago.”

The bad news, though, is that “precisely because recent market volatility is not self-inflicted there is no easy way out”.

Saravelos argues that because the UK relies relatively heavily on foreign financing for its domestic debt, gilts are more exposed than other developed economies’ bonds to US Treasury sell-offs.

“The chancellor and central bank have an important job to do,” says Saravelos. “The Bank of England needs to maintain the credibility of the inflation target. The chancellor needs to signal sensitivity to the worsening global environment by potentially paring back some spending. Both need to avoid any signal of fiscal dominance.

“But beyond a few tweaks here and there, it is largely the currency that will do the work of stabilizing the bond market combined with an eventual peak of US yields.”

Mortgage rates could rise thanks to surge in gilt yields

When setting mortgage rates, lenders pay close attention to a range of factors including swap rates. These are closely linked to gilt yields. As a result, the latest increase in gilt yields does not bode well for those hoping to see mortgage rates fall further.

The average two-year fixed mortgage rate is currently 5.47%, according to comparison site Moneyfacts. The average five-year deal is 5.25%.

What do higher gilt yields mean for the pound?

It’s a pretty miserable time for sterling.

“Typically, higher inflation expectations or a hawkish adjustment to the BoE policy stance drive yields higher, and that is bullish for the pound,” says Kyle Chapman, FX Markets Analyst at Ballinger Group. “In this case, the move is driven not by the macro data, but by heavy gilt supply, concerns about the UK government’s debt sustainability, and the inflationary impacts of the extra fiscal spending in the pipeline.”

This has seen the pound fall by fractionally under 1% against the dollar earlier this morning, though it has since recovered some of these losses.

As Saravelos says, though, the pound’s fall is an important mechanism through which the gilt market can stabilise.

Every cloud has a gold lining?

While the surge in gilt yields has caused a headache for the government and some investors, it has meant good news for the gold price. Up 37.5% compared to this time last year, the gold price is now £2,172 per Troy ounce – a new GBP record.

“Because gold pays no interest, it usually falls in price when bond yields rise,” says BullionVault director of research Adrian Ash. “Gold rising together with government borrowing costs signals how uneasy the markets are becoming over the UK's budget deficits and long-term debt.”

Gilts and Treasuries joined at the hip

Underscoring the point about gilts and Treasuries (the US equivalent) is this chart from AJ Bell, based on Refinitv data:

That’s not to say that the ramifications are the same, though.

“The US has the benefit of being the world’s reserve currency, which underpins demand for dollar denominated assets such as US Treasury bonds,” says Laith Khalaf, head of investment analysis at AJ Bell. “Here in the UK, higher yields put pressure on government finances and increase the risk that Reeves will come back with another tax raising Budget.”

Are higher gilt yields good news for annuity rates?

Many savers who are approaching retirement have a large allocation to bonds in their portfolio – part of their de-risking strategy. Their portfolios may have suffered losses recently as a result of the selloff in gilt markets.

However, there could be some good news for older savers on the cusp of purchasing an annuity with their pension savings.

“The surge in gilt yields could push up annuity rates in the coming weeks,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. “It would add a further boost to a market that has enjoyed enormous growth in recent years.”

She explains that a 65 year-old with a £100,000 pension could currently get up to £7,235 per year from a single life level annuity with a five year guarantee. “We could see this increase further from here,” she adds.

Do higher gilt yields point towards stagflation?

The nightmare scenario is that elevated UK government debt hinders the government’s ability to kickstart growth in the economy, and coincides with an inflationary environment – a combination that economists call ‘stagflation’.

“There is also particular concern brewing about stagflation taking hold, given that inflation has been creeping up and pay growth is still hot, while the economy has been stagnating,” says Susannah Streeter, head of money and markets, Hargreaves Lansdown. “It’s unclear to what extent the UK government’s investment in infrastructure will provide a boost to growth over the longer term.”

Streeter adds: “it seems appetite to buy long-term dated UK government debt has fallen amid the increased uncertainty gripping global bond markets.”

Mortgage costs unlikely to fall any time soon

The start of the year can sometimes be a good time to shop around for a mortgage deal. That was certainly the case last year, when lenders sparked a pricing war as they jostled with one another to attract customers with lower rates.

The start of 2025 looks a little different, though. Ben Thompson, deputy chief executive at Mortgage Advice Bureau, expects mortgage rates to “rise in the near term at least”.

He says: “Some of the factors underlying the recent spike may well soften soon, but it has felt for a while that inflation would persist at a slightly higher level than targeted and as such the cost of borrowing would remain broadly at current levels and isn’t about to fall meaningfully anytime soon.

“What we have seen is the market gradually adjust to a higher rate environment in part helped by wage growth and that means that those who have waited to buy or move home for a few years will now just want to commit and get on with it, as opposed to waiting for mortgage rates to drop much further.”

“We think that bonds will recover before long”

The selloff in the UK government bond market has sparked further criticism of Reeves’ Autumn Budget this week. However, experts at consultancy Capital Economics have called the latest developments a “global bond market storm in a British teacup”.

“We think that bonds will recover before long, with yields falling back more in the UK than elsewhere,” says Hubert de Barochez, senior markets economist at the consultancy.

“One reason is that we expect Trump to fail to cut taxes as much as planned, and therefore that worries over US public finances will abate a bit,” he adds. “What’s more, with inflation near to target in most places, central banks have more room to cut rates if necessary.”

Although UK markets are only pricing in one or two base rate cuts in 2025, most economists think this stance is overly cautious. Capital Economics thinks inflation will fall more quickly than currently forecast and, as a result, expects the base rate to reach 3.5% by early 2026.

“This is why we forecast the 10-year gilt yield to fall back to 4.0% by the end of the year, from roughly 4.8% now,” de Barochez explains.

That concludes our coverage of the UK gilt market today. Thank you for following along with us. We will be back with more live analysis on markets, inflation and interest rates in the coming weeks, with a special focus on the US in the lead-up to Trump’s return to office.

Good morning, and welcome back to our live coverage of the ongoing gilt yields story.

Dan and Katie here, bringing you live coverage and analysis throughout the day.

Eyes on US jobs data as gilt yields edge upwards

10 year gilt yields have crept slightly upwards this morning, though are still below the 4.93% peak that sparked Parliamentary panic yesterday.

US jobs data being released this afternoon is likely to be the next big driver of gilt yield movements. With UK and US government bond yields moving in lockstep over recent months, macro changes in the US market will have a big impact on gilt yields this side of the pond too.

Reuters predicts that approximately 160,000 jobs will have been added during December, with the unemployment rate holding steady at around 4.2%. ING suggests that unemployment could tick up to 4.3%, but predicts that anything above the 150,000 jobs mark would “maintain upside momentum for yields”.

According to Reuters, stronger economic data than that could drive 10-year US government bond yields to a 13-month peak and strengthen the dollar.

A disaster in the making for Reeves?

Chancellor Rachel Reeves rejected calls to address Parliament over the gilt yields crisis yesterday, instead flying to China for a pre-planned three-day visit aimed at strengthening the UK’s trade and economic ties with the country.

While culture secretary Lisa Nandy has defended Reeves’ decision to go ahead with the trip, Reeves will surely have half her mind on the implications of the yield spike for her domestic agenda.

“The recent spike in government borrowing costs is in danger of turning into a political disaster for Rachel Reeves,” says Tom Selby, director of public policy at AJ Bell, “who will no doubt be sweating over the risk that any wiggle room in public finances could evaporate.”

Silver linings

While increased gilt yields are a potential nightmare for Reeves and the government, there are winners and losers as far as personal finances are concerned.

Rising gilt yields are bad news for borrowers, especially anyone with a mortgage that is pegged to the Bank of England base rate, says Selby.

“However, there will have been plenty of people cheering as gilt yields jumped to highs not seen since the 2007/08 financial crash,” he adds. “Returns on cash investments should be bolstered if gilt yields remain elevated, meaning people’s rainy-day savings should grow by more than previously expected. Companies administering defined benefit (DB) pension schemes could also see the value of their accounting liabilities substantially reduced, potentially swinging from a deficit to a surplus as a result.”

As mentioned yesterday, annuities are another potential winner from the gilt yields spike.

“Additional government spending, global uncertainty and higher taxes are all contributing to the recent increase in the cost of government borrowing,” says Nick Flynn, Retirement Income Director at Canada Life. “Whilst there are no cast iron guarantees, if this trend continues, then it’s a strong possibility that annuity rates will be maintained or even increase in 2025.”

READ MORE: Annuity rates rise 7% - is now a good time to buy an annuity?

Gilt yields and taxes

The challenge for Reeves is that the gilt yield increase could completely erase the £9.9 billion headroom contained in her Autumn Budget.

“In order to maintain fiscal credibility, there is a real chance that the Chancellor will be forced to announce at the fiscal update scheduled for 26th March lower government spending and/or higher taxes compared to existing plans,” says Ashley Webb, UK economist at Capital Economics.

While Webb feels that it is more likely Reeves would opt for tighter fiscal policy, he speculates that she might consider raising capital gains tax, alcohol and tobacco duties, air passenger duties or vehicle excise duty. Stamp duty and/or council tax increases on second homes could also be considered, but all of these taxes combined make up just 11% of total tax revenues.

This could potentially force Reeves into raising more tax revenue through, for example, reducing relief on pension contributions for high earners, scrapping the lifetime ISA, or extending the freeze on personal income tax thresholds.

Or, the government could expand the tax base by introducing VAT on products or services that are currently exempt – much as it has recently done with private schools.

All this assumes that Reeves won’t break Labour’s manifesto promise not to raise taxes on “working people” – which Webb calls “the government’s least politically palatable option”.

However, “it could easily raise a lot of revenue from only a small increase in the rate of VAT, income tax or national insurance tax. A 1 percentage point rise in each would raise £9.0bn, £7.3bn and £4.7bn respectively by 2026/27.

“Overall, while a lot can change between now and the fiscal update scheduled for 26th March,” says Webb.

When is US jobs data released?

Stay tuned: the US jobs data release is due at 8.30am US, 1.30pm time in the UK. The results are expected to be a key driver for gilt yields today.

BREAKING: Gilt yields up on strong US jobs data

Employers added 256,000 jobs to nonfarm payrolls in December, far more than the 153,000 FactSet analysts had expected.

Gilt yields have ticked upwards this afternoon as a result. Analysis to follow.

Yields on UK ten-year gilts have ticked up to 4.88% this afternoon, jumping from around 4.83% in the wake of that US jobs report.

Despite new jobs coming in above expectations, and unemployment unexpectedly falling to 4.1%, gilt yields haven’t (yet) exceeded yesterday’s highs.

Why has strong US jobs data pushed gilt yields higher?

In essence, strong US jobs means a strong US economy. A strong US economy means the Fed is less likely to cut interest rates, meaning rates in the country are likely to remain higher for longer.

“The larger-than-expected 256,000 gain in non-farm payrolls in December and drop back in the unemployment rate to 4.1% supports the Fed’s decision to slow the pace of rate cuts and has heightened speculation that the loosening cycle is already over, putting further upward pressure on Treasury yields,” says Thomas Ryan, North America economist at Capital Economics.

UK government bonds (gilts) have moved in tandem with US government bonds (Treasuries) over the past year. A strong US labour market therefore means higher gilt yields.

Market strop out intensifying

The jobs data has dented markets: the pound has fallen 0.58% today against the dollar, hitting a 14-month low, while the FTSE 100 is down 0.25%.

The S&P 500 – which was closed yesterday due to a national day of mourning for former US president Jimmy Carter – opened 0.47% below Wednesday’s close, and has fallen a further 0.35% since then.

“Worries about interest rates staying higher for longer have been reignited by this stronger-than-expected labour market data,” says Susannah Streeter, head of money and markets, Hargreaves Lansdown. “Sentiment has soured on equity markets and the bond market strop out is showing signs of intensifying.”

Further yield increases on the way?

“2025 has already seen notable increases in gilt and US Treasury yields,” says Hal Cook, senior investment analyst, Hargreaves Lansdown. “Today’s employment data out of the US is likely to cause further increases from here.

“The 10-year US Treasury yield spiked just under 10 basis points on the announcement. The 10-year UK gilt yield jumped 5 basis points at the same time. Volatility is expected to continue as the information is digested.”

Cook cautions, though, that US non-farm payroll data is often subject to significant revisions further down the road.

“Data for December, given the holiday season, could well see a big revision in future,” he says, “but that won’t stop markets reacting in the meantime.”

Bond market on the move

Gilt yields have fallen back again this afternoon, after spiking in the wake of the US jobs report.

As of 4pm, they’re sitting around the 4.84% level – a little above where they were prior to the US data release, but well below the afternoon peak.

There could be plenty more shifts in store, though, as Laith Khalaf, head of investment analysis at AJ Bell explains:

“The whole global bond market is on the move as investors shift their expectations for 2025. There is no one smoking gun which explains why bonds are selling off now, but a strong US jobs report is only going to add fuel to the fire. That points to a hot US economy and consequently less scope for rate cuts in the US, with Trump’s potential controls on immigration tightening the labour market even further.

“The US bond market exercises a heavy influence on UK gilts so we can expect some spillover to our own bond market. A strengthening dollar also puts upward pressure on UK inflation which is another byproduct of markets scaling back their forecasts for US interest rate cuts.”

Gilt yield increase is “a problem, not a crisis”

“This week’s leap in gilt yields creates more problems for the Chancellor and is an extra headwind for the economy. But it is not a crisis,” says Paul Dales, chief UK economist at Capital Economics.

While “it is always worrying when UK bond yields rise by more than yields elsewhere and the pound weakens”, Dales says that “the current situation is nothing like the sterling crisis of 1976 or the Liz Truss episode in 2022 as has been suggested”.

The recent moves have been smaller and lower; 30-year gilt yields have increased 70 basis points in the last six weeks, compared to 150 basis points in six days following the Truss mini-budget. That also saw the pound fall by 3%, compared to 1% this time around.

“That’s because the causes are different” says Dales. “The crises of 1976 and 2022 were due to loose fiscal policy at home that led to the government losing credibility. This time, the cause has been global, with the markets concluding that real interest rates need to be higher for longer everywhere to trim inflation.

“The UK has been hit harder than others mainly because of its reliance on overseas investors to fund its current account and government budget deficits. Indeed, the UK’s ‘twin deficits’ are bigger than every other G7 economy, and the euro-zone, except the US, which is seen as a safe haven as the dollar is the world’s reserve currency.

“So when global risk sentiment declines, the UK is more vulnerable to funds flowing to safer shores.”

That said, the gilt yields spike “does cause problems”. Capital Economics estimates that the increase in the debt interest payments will be sufficient to break the fiscal rules Rachel Reeves has previously set out. As discussed, that could force her into either new spending cuts and/or new tax rises – with the former of those “more likely”, according to Dales.

Time to buy bonds?

Does the rise in gilt yields present a bond buying opportunity?

“Bonds are very attractively priced at the moment”, Oliver Faizallah, head of fixed income research at Charles Stanley, tells MoneyWeek. The current climate – one in which inflation is relatively low and stable, while bond yields are high, is “as good a time as it’s ever been to buy bonds”.

He also explains that, while government bonds like gilts are traditionally allocated to the safer parts of a portfolio, high yield bonds can be thought of similarly to equities, and can form part of investors’ allocation to risk given their yields.

See our full explainer on why now might be a good time to invest in bonds.

That's all from us this week. Goodbye for now, but join us next week when we'll pick up the latest news and developments with the ongoing gilt rate story.

Gilt yields up Monday morning

Good morning, and welcome back to our live blog as we continue to keep an eye on the latest in gilt yields.

Yields on 10 year gilts have hit a new high this morning, hovering at around 4.9% as of 9am.

We’ll bring you all the latest updates and analysis as the situation unfolds.

Reeves issues China trade update

Having been called to address Parliament about the gilt yield crisis on Thursday, chancellor Rachel Reeves instead pressed ahead with a planned trade visit to China.

The treasury announced on Saturday that the visit has resulted to agreements to deepen economic cooperation between China and the UK, with the agreements worth an estimated £600 million to the UK over the next five years and a potential £1 billion over the longer term.

“The agreements we’ve reached show that pragmatic cooperation between the world’s largest economies can help us boost economic growth for the benefit of working people – a priority of our Plan for Change,” said Reeves.

“More widely, today is a platform for respectful and consistent future relations with China. One where we can be frank and open on areas where we disagree, protecting our values and security interests, and finding opportunities for safe trade and investment.”

Rumour mill still grinding

The government is clearly keen to broadcast the good news out of China, and for good reason.

Capital Economics estimated on 7 January (last Tuesday) that the rise in gilt yields had wiped out £8.9 billion of the £9.9 billion fiscal headroom that was built into the Autumn Budget. Yields have increased still further since then. There is a very real possibility that all of it will be gone by the time the Office for Budget Responsibility (OBR) revises its forecasts on 26 March.

“With the UK still in the eye of the storm of concern worrying bond markets, it’s set to keep the rumour mill grinding about difficult tax and spending decisions ahead for Keir Starmer’s government,” says Susannah Streeter, head of money and markets, Hargreaves Lansdown. “The government is attempting to wrest the narrative away from painfully high borrowing costs and a plunging pound.”

Part of this attempt involves prime minister Kier Starmer's initiative to invest heavily into AI, announced on Saturday.

The government is "going all out on an AI pitch with recommendations to unleash the power of the technology to help public services become more efficient and help boost growth via special development zones", says Streeter.

The gilt yield drama is playing out against a backdrop of the government desperately wanting to improve economic growth, and improving international trade and domestic productivity are seen as key levers for the government to pull.

Pound hits 14-month low

The gilt crisis has pushed the pound to a 14-month low against the US dollar. “The combination of a robust dollar and a weakening pound is accelerating the capital flight from sterling,” says Nigel Green, chief executive of advisory and asset management firm the deVere Group.

He adds that investors are “turning to safer currencies and assets, as the UK appears increasingly fragile in this turbulent environment”.

A weaker pound is bad news for UK businesses who rely heavily on imports, pushing their costs higher. It could also spell bad news for consumers if businesses look to pass higher costs on by putting their prices up.

Consumers are already staring down the barrel of cost increases this year after changes announced in the Autumn Budget. Chancellor Rachel Reeves hiked employer National Insurance contributions – a change that will kick in from April – in an attempt to balance the state’s books.

Many businesses plan to pass these higher staffing costs on to their customers. A survey from the British Chambers of Commerce, conducted after the Budget, found that 55% of firms plan to raise their prices in the next three months, up from a previous reading of 39%.

Oil prices put further upward pressure on bond yields

While gilt yields are currently correlated with US Treasury yields, movements of both are driven by inflation expectations. Inflation erodes the real value of bond yields, pushing prices down and yields up in response.

So, inflationary pressures on both sides of the pond are likely to contribute towards further increases in bond yields.

On that note, rising oil prices could push gilt yields still higher. Brent crude was trading above $81 per barrel today.

The increase “comes amid renewed concerns amid supplies of crude after the US slammed more sanctions on Russia”, says Streeter. “These are targeted at vessels and tankers, which is aimed at disrupting trade with China and India, leading to expectations of higher demand from suppliers in the Middle East”.

Annuity rates rise further

As anticipated, annuity rates have surged higher in the wake of the gilt market crisis. Annuity rates determine how much you can earn when you buy a guaranteed income in retirement. They are closely linked to long-term gilt yields. The higher the annuity rate, the higher your regular payout. The rate is locked in at the point of purchase.

“The latest data shows a 65-year-old with a £100,000 pension can now get up to £7,425 a year from a single life level annuity with a five-year guarantee,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. “This is up from £7,235 a year last week and up a whopping 48% on the £5,003 that was on offer this time three years ago.”

She adds that annuity rates could rise even further over the coming weeks, potentially hitting the highs seen in the aftermath of the mini-Budget.

Mortgage rates edge up - will they rise further?

Some mortgage lenders like Coventry Building Society, Virgin Money and TSB have hiked their rates, and experts warn that we could see more increases as the bond market turmoil continues.

So far, mortgage rates have only edged up slightly. According to data analyst Moneyfacts, the average two-year fixed mortgage rate is 5.48%, up from 5.47% on Friday. The average five-year deal is 5.26%, up from 5.25%.

Nicholas Mendes​​​​, mortgage technical manager at the broker John Charcol, tells MoneyWeek: "Increased government borrowing and ongoing economic uncertainty have pushed gilt yields higher, which in turn drives up swap rates. Lenders are absorbing these increased costs for now, but they can only do so for a limited time before being forced to adjust their mortgage products."

Frances Haque, chief economist at Santander UK, agrees that mortgage lenders “may well – in the short-term - nudge up pricing to reflect the higher swaps”.

Thankfully, there is no sign (so far) of the mortgage market panic that followed the 2022 mini-Budget.

In the wake of Liz Truss's mini-Budget, two and five-year fixed deals went up by more than a percentage point, and 1,700 lender products - 40% of the market at the time - disappeared from sale in the space of a week.

Yields spike sees investor gilt purchasing increase

Unlike in the wake of 2022’s infamous mini-budget, the current gilt selloff isn’t a sudden thing, but has been brewing steadily since the autumn.

Data from Hargreaves Lansdown shows that its clients took advantage of increasing yields during December, with gilt purchases through its platform increasing 33% year-over-year.

Last week – as gilt yields reached highs not seen since 2008 – gilt purchases reached their highest level in a week by Hargreaves Lansdown investors since October.

“Given the increase in yields, it’s not a surprise we are seeing a spike in gilt purchases,” said Hal Cook, senior investment analyst at Hargreaves Lansdown. “The yield on the 2-year gilt at the end of December was around 4.37% but is now pushing 4.6%. And it was nearer 4.2% at the start of December. For the 5-year gilt, the story is the same – it was yielding about 4.05% at the start of December, 4.33% at the end of December and nearer 4.65% today. Looking back to the end of 2023, the 2-year gilt yield was around 4% and the 5-year nearer 3.5%.”

That's all from us today. Thanks for following all our coverage of the gilt rates story as it unfolds. Stay tuned for future updates.

Reeves to address Parliament

Good morning, and welcome back to our live coverage of the gilt yield spike.

Today’s big news: chancellor Rachel Reeves will answer questions in the Commons today for the first time since returning from a trip to China, the timing of which was criticised by political opponents for coinciding with a week of volatility for the pound and soaring yields on UK bonds. She returned from her trip on Monday as concerns mounted that the government is in danger of failing to meet its own fiscal rules.

The pound regained its footing on Tuesday, after hitting fresh 14-month lows on Monday. Yields on 10-year gilts are presently hovering at around 4.87%, having peaked at 4.89% earlier this morning.

Will Rachel Reeves be sacked?

In the manner of a Premier League manager on a dire run of results, Rachel Reeves received the full backing of her boss prime minister Keir Starmer, yesterday – though only once the cameras were off. At an earlier televised press conference, he avoided making any firm guarantees about her future.

Speculation is rife that Reeves’ position as chancellor could be under threat. Both the Telegraph and the Independent are asking who could replace the chancellor if the situation doesn’t improve, while the Daily Star has revived its infamous lettuce that symbolised the demise of Liz Truss’s premiership.

Former shadow chancellor John McDonnell told the Today programme that further spending cuts would “be politically suicidal” for Reeves. The fiscal rules she set herself ahead of Labour’s election win appear to have boxed her into a corner.

Chancellor Rachel Reeves is expected to make a Commons statement about her visit to China after 12.30pm today, where she will no doubt face questions about the spike in gilt yields.

BREAKING: Reeves addressing Parliament

The chancellor's statement is essentially a rationale behind her decision to visit China last week, as gilt yields were spiking. Her opening speech is concentrating on the importance of the UK's trading relationship with China.

Her opening line stated that "growth is the number one mission of this Labour government".

The questions that follow, though, are likely to focus on the implications of higher borrowing costs on the UK economy and Reeves' economic policies.

Stride shifts focus to rising gilt yields

Shadow chancellor Mel Stride, unsurprisingly, used his opening statement to outline the economic turmoil that rising gilt yields have provoked.

"The pound has hit a 14-month low. Government borrowing costs are at their highest in 27 years... This is a crisis made in Downing Street," he asserted, before asking Reeves why she didn't address Parliament on the issue last week.

Stride finishes his opening statement by asking Reeves which of her promises she will break should the OBR judge that she has breached her fiscal rules in March.

"Wil she cancel promised spending? Will she ramp up borrowing? Or will she raise taxes yet again?"

The chancellor has reiterated her commitment to her fiscal rules. There hasn't been a direct response to the question of where she'll give way should the OBR rule in March that she's breached them.

However, when asked to rule out future spending cuts, Reeves replied "I'm not going to write five years' worth of budgets".

Gilt yields touch 4.9%

Gilt yields are moving relatively quickly while all this is going on. They fell from 4.89% to 4.86% just before 1.30pm, then rapidly jumped upwards to touch 4.9%.

These moves mirror US 10-year Treasury yields, though, so there is every chance that this is the main driver.

What can policymakers do about higher gilt yields?

The debate in Parliament is over (for now), but it highlighted some of the fault lines that the gilt yields increase has exposed. In effect, the government and the opposition benches both blamed each other for the increase in borrowing costs.

Naturally, this raises the question of what, if anything, Reeves or anyone else can now do to reduce them. According to analysis from Ruth Gregory, deputy chief UK economist at Capital Economics, Reeves has three options if her fiscal credibility is undermined:

1. Muddle through until the spending review on 26 March before announcing new tax/spending plans;
2. Announce potential tax increases before the spending review, in the event that the OBR finds she has broken her fiscal rules;
3. Front-run the spending review by pre-announcing lower public spending.

So far Reeves is sticking to option 1, but if her hand is forced into a change of approach Gregory thinks that 3 is more likely than 2 given yesterday’s commitment to be “ruthless” in spending review decisions.

It isn’t just Reeves with the power to respond, though. The Bank of England is another key component in the gilt yields mix.

“The situation is more straightforward for the Bank,” says Gregory. “If there are no clear signs of dislocation in the bond market, the Bank will wait until the next Monetary Policy Committee meeting on 6th February to cast its judgement on the outlook for interest rates.

“But should there be clear signs of significant dislocation in the bond markets… the Bank could say it will do whatever it takes to keep markets functioning smoothly and remind investors of the tools at its disposal. If that doesn’t work, it could take temporary and specific action to restore orderly market conditions, by buying gilts as it did in October 2022 and pausing Quantitative Tightening (QT) (i.e. selling gilts). QT would then continue once market functioning is restored.

“To be clear, this is a last resort. The Bank won’t pause or cancel QT unless there is clear dislocation in bond markets.”

Chancellor to fast-track growth strategy announcement

The BBC says the Chancellor is likely to bring forward the detail of a range of new growth strategies in the next few weeks as she promises to move “faster and further” on the economy.

It says she will deliver a major speech on the overall growth strategy before the end of the month.

Morgan Stanley: Short GBP positions highest since November

Investment bank Morgan Stanley has today published a research note highlighting that FX options pricing data in the week ending Friday 10 January showed investors are shorting the pound at levels not seen since November.

“Overall, Options data suggest that tactical investors are long USD (DXY), while being most short GBP and EUR,” said the note.

Since the start of the year, the pound has fallen roughly 3% against the dollar.

That's all on gilt yields for now. Thanks for following so far. We'll continue to follow the story here at MoneyWeek.

Be sure to check out our inflation live blog, as the latest UK CPI reading is released tomorrow morning.

BREAKING: gilt yields fall on surprise inflation dip

Good morning, and welcome back to our gilt yields live blog.

Yields on 10 year gilts have dropped to around 4.84% this morning – the lowest they’ve been so far this week.

The catalyst for the drop is an unexpected dip in UK core inflation during December, to 2.5%. Head over to our other live blog for more inflation information.

Respite for the government

Experts are in agreement that the lower-than-expected inflation reading provides welcome relief for chancellor Rachel Reeves, whose position in the government has been under pressure following rising gilt yields.

“A lower-than-expected inflation print will provide some relief to the recent sell off in gilts that we’ve seen so far this year,” says Mark Hicks, head of active savings, Hargreaves Lansdown.

“The surprise fall in inflation offers much-needed respite for the government after a tumultuous week for gilts,” says Myron Jobson, senior personal finance analyst at interactive investor.

Scott Gardner, investment strategist at J.P. Morgan owned digital wealth manager, Nutmeg, says “policymakers and treasury officials will be breathing a small sigh of relief as new data shows that inflation fell during the final month of 2024, beating market expectations.

“While it might be odd to be welcoming above target inflation, these results have grown in significance after an unstable start to the year for the pound and government borrowing,” he adds.

Gilt yields fall further

10 year gilts are now trading at around 4.82%, as they continue to fall through the morning. They dipped briefly below 4.80% earlier this morning.

UK inflation data has clearly calmed the gilt markets – for now. However, US inflation data will be released this afternoon. That will likely have a strong impact on gilt yields, given how closely they have been correlated with Treasuries in recent months.

Bad news for the pound?

Gilt yields have fallen back below 4.80%. Corks won’t yet be popping at the Treasury (especially as US inflation data later today could reverse the momentum), but there will be some deep sighs of relief.

However, while the inflation reading has calmed the gilt market, it’s not such good news for the pound, which has fallen slightly against the dollar this morning.

“The dip in headline inflation, particularly in services, will be welcomed by the Bank of England but leaves the pound vulnerable to further weakness as it reinforces the case for additional rate cuts,” says Nikos Tzabouras, senior financial writer at Tradu. “Such action is undoubtedly needed amid weak economic activity and soaring borrowing costs, especially with UK debt exceeding 98% of GDP.”

Further weakening of the pound could create its own inflationary momentum – but aggressive monetary easing appears unlikely at this stage, which has helped the pound find a degree of support.

Gilt yields fall further as US inflation data lands

US inflation rose to 2.9% during December, according to the latest release from the US Bureau of Labor Statistics. That’s slightly higher than FactSet analysts had expected, but matches expectations of economists polled by Reuters.

US Treasury yields have fallen on the announcement, and gilt yields have gone with them. 10 year gilt yields dipped as low as 4.72% before rebounding to 4.76%.

Government bond yields fall in US and UK

10-year gilt yields have continued to fall throughout the day. They even dipped below 4.7% this afternoon – though have now climbed back up to around 4.72%. It means that the gains over the last week that prompted Parliamentary panic have largely been reversed, though they will have to fall a good deal further before chancellor Rachel Reeves will be feeling comfortable about her borrowing plans.

10-year US Treasury (UST) yields have also fallen today, to around 4.67%.

“Following both the UK and US CPI numbers, there has been a bit of respite in both gilts and USTs,” says Oliver Faizallah, head of fixed income research at Charles Stanley.

Underscoring the fact that the government bond yield saga is far from over, though, Faizallah adds that “in the US, concerns around an inflationary government policy and large deficits will likely keep yields elevated for some time.”

That's all from us today. Thanks for following the blog - and if you haven't already done so, pop over to our other one covering today's inflation data to get up to speed there!

We'll keep you up to date with any further developments on gilt yields, which settled well down today at around 4.73%.

Good morning, and thanks for following our gilt yields blog over the last week or so.

10-year gilt yields have come down from their recent peak; today, they’re around 4.64%. They are still at generational highs, though, which will be a concern for the government.

We’re going to wrap our live coverage of the gilt yields story here for now. However, we’ll leave you with this explainer on what gilts are, and whether or not now is a good time to invest in them.

That’s far from the end of the live blogs on MoneyWeek though. Join us on Monday for live coverage of Donald Trump’s return to the White House.

The return you get when buying a bond and holding it to maturity is set at the outset: it’s the yield to maturity when you buy. Yet the market value of the bond between now and maturity can vary greatly as short-term and long-term interest rates change. Investing in a bond fund, which holds a portfolio of bonds of different maturities, makes this even more complicated since the value of the fund will depend on how the value of all the bonds it holds is shifting.

To see this in practice, consider an exchange-traded fund (ETF) such as iShares Core UK Gilts compared to a 10-year government bond. The ETF doesn’t just hold 10-year bonds, but its average maturity is roughly that – 11.5 years now – so it should be a fair comparison (although the exact composition of its portfolio and the way that this has changed over time will affect whether it’s really a good match).

If you bought a 10-year gilt in November 2014, you would have got a yield of around 2.1%, and so your annualised return would have been 2.1%. On the other hand, the 10-year total return from buying the ETF and holding it until now – including interest payments – is around -0.5% per year. The fall in the ETF’s market value is because it holds many bonds that were bought on much lower yields and are now worth less than they were because interest rates have risen.

This works the other way as well. If you bought a 10-year gilt in July 2010, your yield was around 3.5%. If you had bought the ETF and held it until July 2020, when yields bottomed, you earned about 7.7% per year (because it held bonds bought at higher yields that had risen in value).

As you go through a full interest-rate cycle, and as bonds mature at face value and are replaced, this slowly works its way through, and the return should become much closer to the yield at which you bought.

The chart above, which shows the 10-year gilt yield against the market price of the ETF (ie, ignoring all interest payments) broadly indicates how this works. But that takes time.

Consider bond ETFs with a fixed maturity date

There is another kind of bond ETF that has been available in the US for a while and is finally starting to arrive here. These have a fixed maturity: they hold bonds maturing at around the same time, and when the entire portfolio matures, the ETF liquidates and makes a final payment. So the ETF will behave much more like owning an individual bond of a given maturity.

iShares now lists 38 of these in the UK (it calls them iBonds), covering US Treasuries maturing every December from 2025 to 2029, as well as some dollar and euro corporate bonds and – oddly – Italian government bonds. DWS has 12 euro corporate trackers in its Xtrackers range, Amundi has four euro government bond funds, and Invesco has 25 dollar and euro funds, branded as Bulletshares. The only ones that look very useful to me so far are the iShares Treasury iBonds and it would be good to have some longer maturities (the range in the US is much greater). Still, they could be a useful tool for fine-tuning the bond exposure in an ETF portfolio.

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Market worries over the high levels of US government debt have been exacerbated by Donald Trump’s win in the presidential election. With a range of economic policies centred on inflationary tariffs and tax cuts, investors see an increased risk of higher deficits and inflation – and have pushed the yields on government bonds dramatically higher in recent weeks. US public debt is already close to 100% of GDP (standing at $26 trillion) and is currently projected to rise to 122% by 2034. The US national debt (a broader measure that includes intragovernmental debt) is already $35 trillion. That’s a real-term tripling in 30 years and a doubling as a proportion of GDP to 123%, more than all but the most free-spending European nations. It’s also far above the 90% level that was famously (if controversially) posited by economists Carmen Reinhart and Kenneth Rogoff as the point beyond which a nation’s debt tends to act as a drag on economic growth.

Is the US national debt a concern for America's economy?

Apparently not, to judge from the recent election campaign, when the issue was barely mentioned. This is despite fiscal policies from Trump that would raise the deficit from the current level of 6% – “exceedingly high for a country at peace” – to 12%. That compares with 4.4% in the UK, 2% in Germany. Why are the Americans so relaxed? Partly, because when it comes to the risks of running up a gigantic debt pile, the US does still benefit from the “exorbitant privilege” of issuing the world’s primary reserve currency, the dollar.

Its national currency greases the wheels of the world economy, and so its debt issuance has a critical support mechanism shared by no other sovereign borrower. But even so, the unpredictable fiscal agenda of a second Trump term takes the US into “uncharted territory”, State Street strategist Noel Dixon told Bloomberg. If the debt pile grows faster than expected, and Trump’s presidency proves turbulent, the big question is whether global investors continue to see the US as a safe and reliable place to do business. “Will we start to see people truly questioning the integrity of our institutions?” Dixon asks. “That’s a big tail risk. Once the genie is out of the bottle, it’s hard to get back in.” It doesn’t help that during his first term, Trump called the US central bank an “enemy” of the nation.

Is the US bond yield spike a warning for Trump?

The dumping of US government bonds since mid-September means that the yield on 10-year Treasuries – i.e., the long-term interest rate the federal government has to pay to borrow – has surged from around the 3.6% mark to above 4.4%, a leap of 80 basis points. The majority of the surge (about 50 basis points) has happened in the past month, and since Trump’s victory, the yield has carried on rising. These are by no means panic levels: the rate is still just below recent peaks in autumn 2023 and spring 2024. But the upward move over the past month has been unusually sharp, reflecting market concerns over the long-term sustainability of US government debt. Some say the return of the bond vigilantes is nigh.

What’s a bond vigilante?

It refers to the bond market’s putative role as a brake on the government’s ability to spend and borrow. The term was coined by US economist Ed Yardeni in the 1980s, and describes investors who are hawkishly vigilant against fiscal or monetary policies that they consider inflationary – and who force governments to U-turn by dumping bonds and pushing up yields. In 1993-1994, US 10-year Treasury yields leapt from 5.2% to over 8.0% on fears over the Clinton administration’s debt-fuelled spending blitz – obliging the government to reverse course and leading adviser James Carville to quip that he would like to be reincarnated as the bond market as “you can intimidate everybody”. The fear is that Trump will only learn this lesson the hard way.

Are the bond vigilantes coming back?

Yardeni thinks they could be. “If the Trump administration runs excessively stimulative fiscal policy, with lots of spending and tax cuts, leading to even wider deficits, I think then that may cause the bond vigilantes to push yields up to levels that create problems for the economy,” he told The New York Times. Meanwhile, fears over sovereign debt are not just an American issue. The UK has also seen yields rise in response to Labour’s big-borrowing, big-spending Budget. And, globally, public debt is set to exceed $100 trillion by the end of this year, according to an IMF paper published last month – and approach 100% of global GDP by the end of the decade. The US and China are driving that surge, but it’s a global issue that will only become more acute in an era of increased defence spending, ageing populations and the global threat from climate heating.

How bad will it be?

According to UN figures, there are more than 50 developing countries that already spend more than 10% of revenues on debt servicing costs – and 3.3 billion people (two-fifths of humanity) live in countries that spend more on servicing government debt than on education or health. Few countries are currently threatened by disorderly markets, but high levels of debt are already having an impact on global stability, says Spencer Feingold in a recent paper on the issue from the World Economic Forum (WEF). This summer in Kenya, for instance, deadly protests erupted after the government tried to raise taxes in the face of a debt crisis that saw interest payments swell to almost 60% of total government revenues. According to a WEF survey of chief economists working in a variety of global firms and institutions, the outlook is highly worrying. A majority of respondents believed that current debt dynamics will undermine government efforts to boost growth and leave countries poorly prepared for the next economic downturn.

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Short-term interest rates are going down – the only questions are how much central banks cut, and how fast. Longer-term rates are another matter. Yields on US ten-year Treasuries are up by half a percentage point to 4.2% over the past month and UK ten-year gilts are up by a quarter point at the same level. That’s unusual: the only time in recent history that ten-year Treasuries have risen by that much immediately after the US Federal Reserve began cutting was during the 1995 soft landing.

Markets clearly do not believe we will return to the ultra-low rates of the past decade. This seems reasonable. Since 1962, the average (median) yield on the ten-year Treasury has been 5.6% and average inflation over the same period has been 3.09%. As a crude estimate of the real (inflation-adjusted) yields that investors might have been expecting (not what they got, which requires hindsight), the average difference between the two at each point was 2%.

If you figure that inflation will match the Fed’s target of 2%, then a 4.2% yield will give you an after-inflation return in line with the long-term average. If we consider inflation and yields only since 1990, when they’ve been consistently lower than in the 1970s and 1980s, the median difference was about 1.5%. The gap for the UK has been a bit higher: over 3% since the 1960s, but 2% since 1990. So overall bonds look priced for roughly fair value, if that’s the outcome we get.

Time to worry about structural deficits?

Whether inflation will run at 2% is the big question. If it’s significantly higher, we’d expect investors to demand higher real yields (not just higher nominal yields). If it’s lower, we’d expect the opposite. We mentioned reasons why inflation could settle higher without being out of control, from fiscal policy to global trade to geopolitics. The latter is unpredictable, but the former seems clear.

The US runs a large deficit and that won’t change regardless of who wins the election. The UK is also heading in a direction of higher public spending. This is one plausible explanation for why yields are ticking up despite rate cuts: investors are worried about structurally larger deficits and higher inflation. In theory, long-term interest rates should be higher than short-term rates to reflect the risks that an investor takes in lending money for a longer period, so it may seem odd that ten-year yields are fairly close to both five-year yields (US: 4.05%, UK: 4.04%) and 30-year yields (US: 4.52%, UK 4.75%).

In practice, the typical term premium for holding longer-term bonds has been surprisingly modest. For the US, since 1977 when the 30-year bond was introduced, the average spread between the 30-year and the ten-year has been 0.28 percentage points and 0.34 percentage points between the ten-year and the five-year. True, spreads have been very volatile (see chart) and sometimes gone even lower.

Still, when starting from these yields, there isn’t much cushion if inflation beats expectations. Buying 30-year bonds now will be the right call if inflation turns out much lower, but on the balance of risks, shorter-term bonds look like better value.

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Stock portfolios are feeling the “autumn chill”, says The Economist. US markets spent the first half of 2024 in a “euphoric mood”, notching up weekly gains in 28 of the 37 weeks through mid-July for their “best streak in more than three decades”. Yet a series of sell-offs that began over the summer have made for a more cautious mood on Wall Street. 

The tech-focused Nasdaq Composite index dropped 5.8% last week for its worst weekly showing since 2022, while the S&P 500 finished down 4.3%. Disappointing manufacturing and jobs data triggered the latest bout of market shivers, says Kristina Hooper of Invesco. One survey showed US job openings in July were at their lowest level in three and a half years. 

Still, investors should remain optimistic that a “soft landing” – where the world’s biggest economy cools without entering recession – is still possible. For one thing, while US manufacturing is struggling, surveys of the much bigger service sector remain solid. With inflation finally coming under control, long-suffering consumers will start to feel less crushed by price increases. Finally, US interest-rate cuts are imminent and “should help power a re-acceleration”.

Time to forget US stocks and buy bonds?

Shaky stock markets are reminding investors about the attractions of bonds. Yields, which move inversely to prices, are falling. The US 10-year yield has dropped from 4.7% in April to 3.6% today, with the UK 10-year gilt yield similarly down from a peak above 4.6% last year to 3.8% now. Investors traditionally look to bonds to act as a hedge against stock volatility, says Jon Sindreu in The Wall Street Journal. While big tech shares plunged last week, a traditional American “60/40” stock and bond portfolio endured a comparatively gentle 1.9% loss. 

Complex debates about whether fixed income still offers proper diversification aside, there is a simpler reason to like bonds right now: they offer decent, dependable income that investors “may want to lock in” before interest rates fall further. The great debt “shock” of winter 2022-2023 is drawing to a close, says the Bearbull column in Investors’ Chronicle. With the UK embarking on an interest rate cutting cycle, a bullish period for gilts should lie ahead. 

For investors who are in or nearing retirement, an allocation to less volatile bonds may suit their lower-risk appetite better than going all in on shares. And while gilt income is taxed, UK gilts attract capital gains relief, which especially increases the appeal of gilts that are bought at a discount to their face value. Given the well-known fragility of UK government bonds, gilts’ tax exemption is unlikely to be on the Budget chopping block. 

In market lore, bond investors are regarded as level-headed, while stock traders are prone to fads, says Katie Martin in the Financial Times. But over the last two years, bonds have been almost as excitable as shares, swinging from wild predictions of emergency rate cuts to deep gloom. With “signal-sniffing algorithms” playing a bigger role, a “long period of bond-market stability, verging on tedium”, is over.

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Most governments are desperate to lower their borrowing costs, says Jacky Wong in The Wall Street Journal. But in China, the authorities think markets are lending them too much money. Chinese banks have been piling into bonds, which causes their yields to fall. The country’s 10-year yields have dropped from 2.6% to roughly 2.18% over the past 12 months. 

Beijing wants to ward off a growing “speculative frenzy”. The “official explanation” is that banks that pile up bonds are exposing themselves to “huge losses” if rates turn – as America’s Silicon Valley Bank learned to its cost last year. Authorities have sought to cool markets by naming and shaming “a group of rural banks”, says Robin Harding in the Financial Times. Their “unusual sin”? Buying too many government bonds. It’s rather “like punishing a child for tidying their bedroom”.

Why are bonds looking attractive in Beijing? 

Yet the rush into government bonds is not a mere speculative bubble that needs to be popped. Rather, it is the “wholly rational” choice in an economy where the alternatives – stocks and property – have long disappointed. Bond markets are sending a signal that the economy is slowing and deflation is a growing threat. While Chinese price changes can be difficult to gauge, one measure – the GDP deflator – has fallen 0.7% over the past year amid sluggish domestic demand. Low or negative inflation increases the real return on bonds. Assets in Chinese bond mutual funds consequently soared 40% in the year to May, says Nicholas Spiro in the South China Morning Post. “Beijing might not like the bleak signal low bond yields are sending”, but “it cannot defy economic gravity”. 

Households and businesses are focused on paying down debt: “last month, bank loans shrank for the first time since July 2005”. Amid the longest period of deflation since 1999, policy circles are abuzz with comparisons to Japan’s prolonged slump in the 1990s. The root cause of sluggish consumption is not a mystery, says The Economist. In 2019, residential property accounted for 60% of the average Chinese city resident’s wealth. The property slump has “damaged consumer morale”. Consumption did pick up last year as the economy reopened, but spending “has since begun to flag”. 

Officials haven’t stood still. They have been rolling out a RMB150 billion (£16.13 billion) incentive scheme to encourage households to buy new electric cars, refrigerators and televisions. But the scheme equates to a mere 0.3% of the country’s annual retail sales. Another approach to reviving consumers’ confidence is through stock markets, says Wolf Richter on Wolf Street. 

Earlier this year, “state-controlled funds” – known as the “national team” – bought an estimated $66 billion in local exchange-traded funds. That wave of buying helped draw in foreign fund managers and sparked a 17% rally in the local CSI 300 index between February and May, but since then the sell-off has resumed as investors have taken tactical profits. The CSI 300 has fallen 36% since the start of 2021 and is still 40% short of its 2007 peak. Who said “buy and hold” always works?

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Interest rate cuts aren’t always a cause for celebration if you are an investor. While rate cuts ease pressure on individuals and businesses by lowering borrowing costs, they can also signal that the health of the economy is declining.

For the past three years, investors and economists have been speculating about the likelihood of a “soft landing”. Would central banks be able to raise rates just enough to tackle inflation, before lowering them in time to prevent a recession?

For a while, the picture looked positive. Economies proved surprisingly resilient in the face of higher rates and stock market performance looked good. After a rough year in 2022, the S&P 500 delivered back-to-back returns of more than 20% in 2023 and 2024. Global equities weren’t too far behind.

Despite this, the picture has become more complex in recent weeks. US president Donald Trump has spooked businesses, households and investors with his erratic tariff regime which threatens to push inflation higher and dampen economic growth.

While interest rates remain an important consideration for investors as they construct their portfolios, it is impossible to take advantage of the shifting interest rate environment without first considering the latest geopolitical developments.

Firstly, geopolitical developments will influence the speed and extent of rate cuts. Secondly, they will influence what's behind them. In other words, are central bankers cutting rates because inflation has come under control or because growth has become a concern?

These considerations will shape whether investors are bullish or defensive in their approach.

1. Gold

The current interest rate environment could make gold attractive. The gold price tends to rise when interest rates are cut, as gold (which pays no interest) becomes more attractive on a relative basis as the yield on cash falls. The gold price has continued to hit new highs so far this year and is up around 11% year-to-date.

Beyond interest rate considerations, gold bugs will tell you that the yellow metal is always a good thing to have in your portfolio. It holds its value well, meaning it can act as a hedge against inflation. It also has a low correlation with equity markets, which means it offers good diversification potential.

Demand for the asset remains strong, and safe-haven buying could propel it even higher going forward. Physically-backed gold ETFs saw significant inflows in February totalling $9.4 billion, the strongest since March 2022, according to the World Gold Council.

“Recently, Trump's tariffs have increased uncertainty and market volatility, which supports the likelihood of gold being viewed as a safe-haven asset. These factors have traditionally driven investors toward gold as a reliable investment during unstable times,” said Rick Kanda, managing director of The Gold Bullion Company.

See MoneyWeek’s round-up of the best gold ETFs.

2. Bonds

Bond prices tend to rise when interest rates fall, as the coupons on existing bonds start to look more attractive than those on new issues. With further interest rate cuts expected over the course of 2025, the asset class could be worth a look. Yields are still high, meaning a decent level of income is on offer too.

When weighing up which sorts of bonds (or bond funds) to include in your portfolio, there are a range of considerations – from credit quality to duration. As recessionary risks ramp up, investors might want to opt for more creditworthy parts of the market. This could include developed market government bonds or high-quality investment-grade corporate bonds, where the risk of defaults is minimal.

Another reason for opting for more creditworthy bonds in today’s environment is that credit spreads (the premium investors get paid for taking on more credit risk) are currently quite tight. In other words, investors are not being compensated that well for buying riskier bonds.

When it comes to duration, some might make the case for investing in bonds with longer maturities to “lock in” higher interest rates for longer. However, with inflationary pressures heating up again, this approach could come with risks.

“Although longer-dated bonds have high yields which can be locked in, the market volatility of these bonds can result in significant swings in value,” said George Martin, senior fixed income analyst at wealth management firm Charles Stanley. For this reason, he favours shorter duration bonds around the two-to-three-year level.

The longer a bond’s duration, the more sensitive it is to changes in inflation expectations. “Longer-dated bonds therefore carry a higher level of risk, and in a world where inflation doesn’t get back to the central bank's 2% target, investors could see losses, despite the bonds having a high yield on paper,” Martin added.

3. UK dividend stocks

Although bond prices will rise as interest rates fall, the level of income on offer in the bond market will start to come down. The same is true for cash yields. We have already seen a barrage of interest rate cuts in the savings market over the past year. As this takes place, investors who are reliant on income may need to consider increasing their allocation to dividend-paying equities.

The UK market is a fertile ground for dividend stocks. Currently, the FTSE 100 is offering a 12-month forward dividend yield of 3.8%, based on Factset data. The FTSE 350 is slightly higher at 3.9%. This is not too far behind 10-year government bonds, which are yielding 4.7% at the time of writing. Share buyback activity has also risen in the domestic market in recent years, meaning the real cash return investors are getting is higher than the dividend yield would suggest.

“Thus far in 2025, the UK equity market has offered more dividend increases than it has cuts, more share buyback announcements in value terms than at the same stage in 2024, and more positive surprises than negative ones,” said Russ Mould, investment director at platform AJ Bell. “This is all despite what appears to be, on the surface, a gloomy macroeconomic backdrop and a tense geopolitical one.”

If the domestic market continues the year as it started, with strong share price performance, you could also benefit from capital growth. Stock markets around the world have taken a hit in recent days, but the FTSE 100 is still up around 3% year to date. This compares favourably to the S&P 500, which is down almost 5% over the same period.

Alternatively, if the market takes a downturn, dividend stocks could prove a defensive play. The ability to regularly pay a consistent (or rising) dividend to shareholders is often a sign that a company has good financial discipline.

4. If you are more bullish on the growth outlook… small caps

Those who are more optimistic about the economic outlook might want to focus on less defensive areas of the market. For example, if you think recessionary fears are overblown, small cap stocks could be worth a look.

Smaller businesses typically suffer during periods of high inflation and interest rates. It can be more difficult for them to swallow price increases and they are often more leveraged (and more exposed to floating-rate debt) than their larger counterparts. As inflation comes under control and interest rates fall, they can rally.

Research from global investment company Aberdeen, published earlier this month, suggests UK small caps offer particular opportunities, trading at a discount of more than 24% compared to their 10-year average.

That said, it is worth pointing out that they could take a hit from the increased labour costs coming in from April. “Smaller firms may find it harder to adjust to the increased costs brought by the [higher] minimum wage and higher national insurance contributions,” Mould notes.

The money pages of the weekend papers are often pretty miserable. But one piece in the Financial Times particularly stands out. 

Claer Barrett told us about Martin, a 59-year-old forced into early retirement after developing a disability. He checked up on the value of his pension in June 2021 and found it was worth £200,000. He checked again in October 2023 and that number was £134,000. A third was gone. 

What on earth, you might ask, went wrong? 

The answer, says Barrett, is “lifestyling”, a system used by pension-fund managers to cut the risk in portfolios as their beneficiaries age. When you are young, your manager invests your money in equities – after all, if things go wrong, you have plenty of time to make the money back, and history shows very few ten-year periods and even fewer 20-year periods in which equity investors don’t come out ahead. However, as you head towards retirement age, your risk of losing money in the equity market rises – there are plenty of five-year periods in which equity investors do not come out ahead. With that in mind, your provider moves your money into something safer as you age. That is, bonds. 

I have a small pension, from a past employment, with Aviva, which, ten years before my retirement date, “aims to avoid large falls in the value of your pension by having a greater amount of money in less risky assets such as government and corporate bonds”. By the time you hit retirement, the odds are your fund will be entirely invested in various bond funds – as it looks like mine will be. This sounds good – and for years worked pretty well. 

But as Martin found out, it doesn’t always work. Far from it. When interest rates rise, the capital value of bonds falls (to create a higher yield). 

In the UK the bank rate has gone from nearly nothing to 5.25% over a matter of just two years. And here we are. Bond prices have nosedived. Last year some bond funds saw losses of 30% (just as bond prices rise when interest rates fall, they fall as interest rates rise). Martin was being lifestyled into a bond fund that fell 50% as rates rose. 

So much for avoiding large falls in the value of your pension pot.

Pension pot mistakes to avoid 

1. You cannot and should not place blind trust in your pension provider
In the main, they do an adequate job, albeit at slightly too high a cost but when it comes to lifestyling, they have failed significantly. That the bond market was in a bubble – that rates could really go no lower and may well go rather higher – should have been no surprise at all. This was well flagged across the markets and in the press (MoneyWeek warned on it several times). 

In sticking with lifestyling even as an obvious bond bubble built, the managers made portfolios more rather than less risky. That’s really not OK. 

2. Inertia
Most of us end up in a default fund of some kind, structured based on the expectation that we will buy an annuity with our lifestyle pot when we retire. 

The existence of one default encourages inertia: we mostly don’t buy annuities any more (we keep our pot and enter drawdown), but without being forced into choices we can easily just accept bad options (as I may have). The pension managers should perhaps encourage us to think a little more. That said, more of us should take the time to read the small print.

Aviva is careful to let its clients know the risks:

• They move your money automatically on set dates, “so your money may not be moved at the time that gives the best return on your investment”.
• They’ll be moving the money into lower-return assets over time, so “there is a greater possibility that the investment funds we move your money into may not cover your charges”.
• And “there’s no guarantee that any of these strategies will prove beneficial to your pension pot”.

How to safeguard your pension?

Having read that small print, what should you do? 

One answer is nothing. You might think the worst is over for the bond market. Inflation has been coming down (perhaps it was “transitory” after all) and that suggests that interest rates will, too – and that bond prices will be at least more stable. 

But that inflation will fall back to 2% and stay there is very far from a given. Rising geopolitical conflict, and in particular the supply-chain disruption resulting from conflict in the Red Sea, could easily bring us another nasty bout of inflation – in our new world it is hard to be clear that the equity-bond shift will once again be consistently low-risk. 

You might also ask yourself why, if you are not buying an annuity, you want to de-risk in the first place. You want your pension fund to provide you with an income for life. That means you need to hang on to significant equity exposure indefinitely (the dividends available on UK equities being, as one independent financial adviser puts it, “nature’s annuity”). 

Once you have retired you should also question the wisdom of holding bond funds at all rather than just a couple of individual gilts. Hold these to redemption and you will definitely get your money back. You don’t have that reassurance with a corporate bond and you don’t have it with a bond fund, either.

As an aside, remember that if you are creating an income outside a self-invested personal pension (SIPP), capital gains on a bond fund will be subject to capital gains tax, whereas those on an individual gilt will not be.

Next steps 

Step one, then, is to check on your pension – and how it is invested. Not all providers’ websites are good for this. You might need to telephone to ask what you have and what the other options are. You might be able to shift to a fund with less embedded risk for now and then find a way to de-risk your own portfolio (with gilts, for example) later. 

Finally, if you are particularly lazy and simply want to avoid being lifestyled into bonds in the shorter term, you can go on to your provider’s website and change your retirement age. The later you make it, the longer until the automatic lifestyling kicks in. That might give you a bit more time to consider matters.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription. 

Investors are set to get access to the primary gilt markets with investment platform Hargreaves Lansdown and will even be able to purchase and hold the bonds for free.

The primary gilt markets have long-been the preserve of institutional investors, with retail customers typically only able to access government bonds through secondary markets.

But in what is described as an industry-first, Hargreaves Lansdown users are to be given access to Debt Management Office (DMO) gilt auctions.

It comes as high interest rates and volatile equity markets have boosted the attractiveness of gilts, pushing yields higher.

“This is a ‘first’ for retail investors and gives them fair access to gilts in the primary market under favourable terms,” says Tim Jacobs, head of primary markets at Hargreaves Lansdown

“Muted equity markets and higher interest rates have led to a significant rise in client demand for fixed interest products.”

“The conventional auction process for Gilts is designed for institutions and may not be suitable for some retail investors. However, the new process invites retail investors to participate with favourable terms.”

How to access gilts through Hargreaves Lansdown

Investors can already purchase government bonds or gilts on many investment platforms including Hargreaves Lansdown.

But this has typically been limited to the secondary market, meaning investors may not get as good a deal if they had taken part in the initial auction process.

Hargreaves Lansdown says annual gilt trading volumes on its platform are up 315%.

Currently, more than 25,000 clients hold one of the 57 gilts available on the platform.

However, this has only been possible through secondary market purchases

Hargreaves Lansdown has worked with the DMO and Winterflood Securities to let retail investors participate in DMO auctions alongside institutions such as pension funds.

Under the arrangement, investors will be informed about an auction that will be made available through the Hargreaves Lansdown platform.

 The DMO will issue a prospectus for the gilt sale seven days in advance and retail clients will have until 4pm the day before the auction to apply. This means that Hargreaves Lansdown users will have six days to review the prospectus and submit an order.

At the point of application, clients will know the duration and coupon of the government bond.

They will not know the price until applications have closed and the auction has been completed.

It works similarly to an equity initial public offering that investors may be used to, where you are only informed about the price range and only get the actual price once applications close.

Hargreaves Lansdown clients will receive the average accepted price (AAP) which is determined during the auction.

What gilts are on offer?

The first gilt that investors can back will be a 4% Treasury Gilt 2031

The seven-year gilt matures on 22 October 2031.

Investors will still also be able to purchase gilts on the secondary market but would need to pay dealing fees.

How much will it cost to invest in government gilts?

There will be no dealing fees for buying government bonds through the auction process and Hargreaves Lansdown confirmed to MoneyWeek that other sales will have the same terms.

In contrast, you would need to pay dealing fees if you buy gilts on the secondary market.

The gilts can be held in an ISA, which has a 0.45% annual charge capped at £45 for this type of asset. There is also a 0.45% annual fee for a self-invested personal pension, capped at £200 per year. 

Most clients purchase gilts in their fund and share account, says Hargreaves Lansdown, as there is no capital gains tax to pay on these assets.

This means you won’t pay a penny on purchasing the government bond and the capital gains if you hold it until maturity.

There will be dealing fees if you decide to sell.

Is it worth investing in government gilts?

Gilts or government bonds can provide a regular income and ‘safe haven’ for those worried about volatile equity markets.

Yields have improved for new issues as interest rates have increased.

But gilt yields could become less attractive in the future given that many analysts think the base rate has peaked and the Bank of England could cut the cost of borrowing in the coming months.

It is also worth checking the real return you are getting after inflation.

“The good news for gilt investors is that prices have reset to much more reasonable levels and yields look relatively attractive,” says Laith Khalaf, head of investment analysis at AJ Bell.

“There are still risks out there, notably sticky inflation, the UK election, and the potential for a supply glut coming from a combination of quantitative tightening and new issuance.

“However, the risks and returns on offer look far more balanced than they have since the financial crisis.”

A recent survey of professional pension trustees of UK defined-benefit pension schemes, from Charles Stanley Fiduciary Management, revealed that 82% of trustees believed that they had the knowledge and skills needed to handle the “liability-driven investment” (LDI) crisis. Moreover, 72% of trustees were confident in using LDI as a tool to manage risk and 78% thought their scheme had the right governance in place to handle the LDI crisis. This is laughable.

In response to the greatest investment bubble of all time – which saw the yield on government bonds falling to levels that, according to research by Bank of America, were the lowest for 5,000 years – these trustees saw fit not only to load their funds up to the gunwales with government bonds but also to speculate on further falls in yields using derivatives.

The roots of the LDI crisis
When bond yields started to rise, the losses mounted, leading to the LDI crisis. Pension funds were forced to close out their speculative positions by selling bonds in a falling market to cover their margin calls. This resulted in a market panic, which drove ten-year gilt yields over 4% and sterling towards parity with the dollar.

The crisis has been widely blamed on Liz Truss’s mini-budget. But the fact that bond yields have been rising across the developed world (with ten-year gilt yields recently reaching 4.6% and ten-year US Treasury yields 4.8%), even though inflationary pressures have abated, shows that this is nonsense. The truth is that the trustees were caught in a wholly predictable market crash, which has lost the pension funds, for which they are responsible, hundreds of billions of pounds.

Since March 2000, ten-year US Treasuries have lost 46% of their value (in nominal terms) and 30-year bonds 53%. The bear market may now enjoy a respite, but it is probably not over. As investment strategist Ed Yardeni of Yardeni Research points out, the supply of bonds has increased thanks to the extravagance of governments. Meanwhile, demand has decreased as banks have stopped raising their holdings and central banks are selling (at a loss, inevitably) – in a reversal of quantitative easing. “The question is whether the [rise] in yields is enough to attract enough demand,” he writes. The answer is probably not, despite the urgings of investment advisers – who never saw the crash coming because they were far too busy being bearish about stockmarkets – to load up. Once bitten, twice shy, as the saying goes. 

Bond yields have been below inflation for years and although they are now above it in the US, real yields of 1.5% are not tempting. In the UK, real yields are still negative. What Yardeni calls the “bond vigilantes” still aren’t happy, and they are likely to determine the fiscal policy of governments. That means making borrowing much more expensive, with real yields rising to 3% and governments slamming the brakes on spending. At present, they are only cutting back on planned increases. The age of austerity beckons and with the vigilantes in control, a lot of innocent bystanders will get shot.

Stockmarkets, meanwhile, have been held back by the need for earnings multiples to fall as bond yields rise, but corporate earnings have held up well and are now poised to rise again. In the longer term, the absence of ultra-cheap loans should discourage speculation and low-quality investment but encourage higher returns on capital. This trend, along with the reining in of government spending, should result in higher productivity, higher economic growth and higher corporate profits. Investors have nothing to fear from the bond market crash – they just need to be patient.

The winners of the bond market crash
There have, though, been some real winners from the bond market crash. Defined-benefit pension schemes were so keen to control future liabilities that they offered very generous terms to 64-year-old members, often 25- 30 times their current pension entitlement, to those who wanted to transfer out. Those who did so will have done well, provided they didn’t invest in gilts. The terms offered will now have deteriorated to around 15 times, but opting out may still make sense: who can now trust the actuaries, trustees, managers and regulators of these pension schemes to deliver? It might be better to exit now and weight a self-invested pension fund much more towards equities.

The government appears to have persuaded the big pension funds to invest more in equities, but the agreement hardly inspires confidence. The government wants the investment to be in Britain, preferably in the infrastructure projects it can no longer afford. The pension funds have lost so much money in bonds that they are discredited in investment decision-making and have much less to invest. This does not augur well for the members of their schemes.

There are some pension funds, however, that should be congratulated. The Universities Superannuation Scheme has swung from a £14bn deficit a few years ago to a £7bn – and rising – surplus. This has enabled benefits that were cut to be reinstated and the contributions of employers and members to be reduced. The strong performance is no thanks to the regulator and trustees who were urging the scheme to “de-risk” by switching the portfolio more heavily into overpriced bonds, to cut benefits further and to impose larger increases in contributions. Determined resistance by higher-education establishments, staff and the University and College Union prevented a disastrous change of strategy. Both employers and staff are now reaping the benefits. 

Paving the way for a more rational investment landscape
This shows the benefit of accountability and proper supervision in the management of pension funds, as in all investments. The more tightly the do-gooders, claiming to protect the interest of scheme members, grasp the funds, the more worried the real owners should be.

The pension-fund trustees who answered the survey are congratulating themselves because rising bond yields have led to their actuarially estimated future liabilities falling even faster than their assets. But the losses in assets are real while the reduction in liabilities is hypothetical. Every billion lost is a billion that should have been invested in infrastructure and other attractive opportunities in the UK or overseas. From that, everyone would have benefited. 

If it takes another 5,000 years for the lows in government bond yields reached in 2020 to be seen again, so much the better. Ultra-low interest and bond yields caused financial chaos. They distorted asset valuations, created false incentives, destroyed the balance sheets of pension funds, encouraged governments into profligacy and syphoned money away from productive investment into speculation. The suddenness of the change has unnerved many who had come to believe that a world of free money was normal. But it paves the way for a much more rational landscape – one that favours risktaking and equities.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

A new retail bond paying an 8.25% coupon has launched, beating the interest rates on top savings accounts.

The best savings account currently pays 4.7%, while customers can get up to 7.5% with a regular savings account.

Alternative property lender LendInvest’s 8.25% bond will likely appeal to savers fed up with falling interest rates, and investors looking for regular income.

Retail bonds pay a fixed rate of interest – known as the “coupon” – for a set period. They are issued by companies and charities looking to raise extra capital by borrowing from investors.

However, retail bonds are not the same as savings accounts; there are risks involved. We look at how the LendInvest bond will work, and the risks of retail bonds.

How will the LendInvest retail bond work?

The LendInvest bond will pay investors a fixed 8.25% rate bi-annually until its maturity in 2030. The offer period is expected to close on 11 November.

The bonds – which represent LendInvest’s fifth issue – will be listed on the London Stock Exchange’s Order Book for Retail Bonds and are available via AJ Bell, Hargreaves Lansdown, Interactive Investor and other major platforms.

The minimum initial subscription is £1,000, with increments of £100 thereafter. Interest payments are expected to be made on 18 May and 18 November in each year, with the first due on 18 May 2026.

The new bonds are expected to be admitted to trading on the London Stock Exchange's regulated market and through the electronic Order Book for Retail Bonds (ORB) on 18 November 2025.

So, what is LendInvest exactly? A UK-based alternative property finance platform, it provides short-term, development and buy-to-let mortgages to professional property investors and developers.

The company is listed on AIM. As at 31 March 2025, it reported funds under management of £5.13 billion and platform assets under management of £3.23 billion.

LendInvest says it has a strong track record, having repaid its previous two matured bonds in full without loss to its holders.

It says that investors buying the new bond “can gain exposure to a diversified and fast-growing portfolio of asset-backed UK property loans. This ranges from buy-to-let and bridging finance to residential and commercial development, aimed at experienced and professional borrower clients”.

Rod Lockhart, CEO of LendInvest, said of the new bond: “This issuance represents the continued development of our secured-income programme and provides investors with access to bonds backed by UK property-finance assets within a clearly defined structure.”

If you already hold a LendInvest bond, you may be able to swap it for the new issue under a proposed “exchange offer”. This would allow holders of the outstanding 11.5% notes due 2026 and 6.5% notes due 2027, each issued by LendInvest Secured Income II plc, to exchange their holdings for the new bonds.

What are the risks of retail bonds?

First, let’s look at the differences between savings accounts and retail bonds. Cash held in UK savings accounts is protected by the Financial Services Compensation Scheme (FSCS), with up to £85,000 per person, per banking licence, covered in the event of a collapse.

Retail bonds, however, are not covered by the scheme. So if the issuer were to go bust, there would be no guarantee that investors would receive their money back.

Laith Khalaf, head of investment analysis at AJ Bell, tells MoneyWeek: “While the headline rates on retail bonds might be extremely attractive, there’s no such thing as a free lunch when it comes to investing, and higher levels of interest generally reflect more risk.

“Investors need to consider the return of their money, as well as the return on their money. If a company you loan money to goes bust, then you may lose some or all of your capital, as well as outstanding interest payments.”

He says it’s crucial that investors have a handle on the finances of the company (or charity) issuing the bonds before buying them, which can be found in their accounts, and most specifically the balance sheet.

Khalaf adds: “If your retail bond doesn’t repay your capital in full, then you have no recourse to the FSCS. Consumers need to treat retail bonds as an investment, which carries capital risk, rather than as a high-interest savings account, which largely doesn’t.”

Having said that, it’s worth pointing out that while retail bonds like the LendInvest one have risks, they are not “mini-bonds”, the advertising of which has been banned by the Financial Conduct Authority.

LendInvest’s retail bonds will be traded publicly on the London Stock Exchange (LSE), so investors have the reassurance that the stock exchange’s requirements have been met.

What is the Order Book for Retail Bonds (ORB)?

The LSE introduced the Order Book for Retail Bonds (ORB), a dedicated platform for bonds aimed at retail investors, in February 2010.

Traditionally, bonds are traded in lots of £100,000, making it all but impossible for the average investor to buy a portfolio of their choosing. However, on the ORB, the majority of issues can be traded in lots as low as £100.

The ORB hasn’t really taken the market by storm. After an initial flurry of trading, new issues dried up, although a few firms continue to use the platform.

Companies using the ORB over the past few years include International Personal Finance (bond maturing on 12 December 2027 and paying 12% per annum), and Belong (paying 7.5% through to July 2030).

With the Bank of England set to continue cutting interest rates, it appears time is now short if you want to secure an inflation-busting savings account. So, how do National Savings & Investments (NS&I) savings rates compare to the rest of the market?

NS&I is a government-backed savings bank. It primarily exists to raise money for the Treasury, but also to provide value for money to taxpayers and savers.

It’s best known best for its Premium Bonds, which offer cash prizes in a monthly draw. While the returns offered by this savings product aren’t guaranteed, NS&I has several accounts and bonds that do provide certainty for your money. For example, British Savings Bonds.

So, with interest rates potentially going down even further in the near-future, how do NS&I’s savings accounts compare to the best savings rates on the market? We’ve crunched the numbers.

NS&I savings: how do its interest rates compare?

To map out how NS&I stacks up compared to the rest of the savings market, MoneyWeek has mapped out the easy-access, ISA and bond products they offer. We’ve also included the current best rates across each category.

Easy-access accounts

NS&I rates:

• Direct saver - 3.75% (variable)
• Income Bonds - 3.75% (variable)

Market-leading rates:

• Cahoot Sunny Day Saver - 5% (variable)
• Atom Bank Instant Saver Reward - 4.85% (variable)
• Principality BS Online Bonus Triple Access - 4.85% (variable)

ISAs

NS&I rates:

• Direct ISA - 3% (variable, also easy-access)
• Junior ISA - 4% (variable)

Market-leading rates for adult cash ISAs:

• Trading 212 Cash ISA - 5.17% (variable)
• Moneybox Cash ISA - 5.17.% (variable)
• Plum Cash ISA - 4.68% (variable, interest drops based on amount saved and number of withdrawals in a year)

Market-leading JISA rates:

• The Stafford Building Society - 4.75% (variable)
• Coventry Building Society - 4.7% (variable)
• The Family Building Society - 4.6% (variable)

Bonds

NS&I rates:

• Two-year British Bonds - 4.1% (fixed)
• Three-year British Bonds - 4% (fixed)
• Five-year British Bonds - 3.9% (fixed)
• Three-year Green Savings Bonds - 2.95% (fixed)

Market-leading two-year rates:

• SmartSave 2 Year Fixed Rate Saver - 4.61%
• Hodge Bank 2 Year Fixed Rate Bond - 4.6%
• Hampshire Trust Bank 2 Year Online Fixed Saver - 4.51%

Market-leading three-year rates:

• JN Bank - 4.6%
• SmartSave - 4.55%
• Oxbury Bank - 4.54

As you can see, NS&I is not offering market-leading rates on any of its savings products. Here’s a rundown of the advantages and disadvantages of saving with the bank.

What are the advantages of NS&I?

There are three big benefits of saving with NS&I. First, its savings accounts often have higher maximum balances than other banks and building societies.

For example, savers can hold up to £2 million in NS&I’s easy-access Direct Saver account. At the moment, this variable rate account offers 3.75% interest on the full amount sitting in this account.

Although this is hardly a market-leading rate, the maximum balance outshines most competitors.

So, if you have a big pot of cash that you want to grow (and, in this instance, don’t mind paying tax on), an NS&I account could be ideal.

The second advantage is that NS&I is backed by the government. This means NS&I cannot go bust and you can guarantee that 100% of your money is safe. Much of the rest of the market is covered by the Financial Services Compensation Scheme (FSCS), which only guarantees compensation of up to £85,000 per person if a bank goes bust. You should always check if a bank is covered by the FSCS before saving your money with them.

Third, if you've maxed out your ISA allowance and are worried about paying tax on your savings interest, NS&I has a unique tax-free savings product - Premium Bonds. If you win, the cash you receive is completely tax-free.

Of course, you need to win to get any sort of return on your money. But whatever you stow away in Premium Bonds is completely shielded from HMRC.

Every other non-ISA savings account in the UK is subject to tax if you exceed your annual allowance LINK. Allowances are particularly small for higher and additional-rate taxpayers, so it’s worth finding out how to avoid the savings tax trap.

 What are the disadvantages of NS&I?

One of the drawbacks with NS&I is that it rarely offers the highest saving rates. The reason for this is that it has to balance the interests of savers, taxpayers and the government. So, you cannot rely on NS&I to be market-leading.

Sarah Coles, head of personal finance at the investment platform Hargreaves Lansdown, says: “For the vast majority of the time, NS&I applies the time-honoured rule that it wants to offer something in the middle of the pack, so it attracts enough cash, but without paying over-the-odds for it.”

Someone choosing NS&I’s Direct ISA, which currently has a rate of 3%, would be sacrificing an extra 2.17% of interest by not picking the top cash ISA on the market (Trading 212, 5.17%).

Very occasionally, NS&I does offer a big-hitting rate. Its 6.2% one-year fixed bond was chart-topping until its withdrawal after just five weeks in late-2023. So, MoneyWeek would advise acting quickly to snap up any market-leading products from NS&I, as they’re unlikely to hang around for long.

Another disadvantage of NS&I for some savers is that it does not have a physical presence on the high street. Additionally, some NS&I accounts are online-only. While bank and building society branches are closing at a rapid rate, most major brands are likely to have at least some sort of presence in your area. And if they don’t, you can often bank with them over the phone or through the post.

The Bank of England has hiked interest rates to 3% this year, as it attempts to control rampant inflation in the economy. It also looks as if the central bank is going to raise rates again when it meets on 15 December.

In general, higher interest rates mean that borrowing money becomes more expensive, which can discourage borrowing and spending, but they also make it more attractive to save money.

In fact, we’re seeing interest rates on savings accounts return to levels not seen since before the financial crisis as banks fight over our business.

Interest rates on bonds are also on the up, which is good news for investors who’ve been starved of income over the past decade.

Why now could be the time to buy bonds

Interest rates and bond prices have an inverse relationship, meaning that when interest rates rise, bond prices fall, and when interest rates fall, bond prices rise.

This relationship exists because when interest rates increase, new bonds are issued at higher interest rates (commonly referred to as the bond yield), making existing bonds with lower interest rates less valuable. As a result, investors will be willing to pay a lower price for existing bonds with lower interest rates, causing their prices to fall.

Conversely, when interest rates decrease, new bonds are issued at lower interest rates, making existing bonds with higher interest rates more valuable. As a result, investors will be willing to pay a higher price for existing bonds with higher interest rates, causing their prices to rise.

Other factors also influence bond prices. According to Matthew Roche, Associate Investment Director at Killik & Co, “Sentiment is also a major driver of market movement.”

“When investors become more risk averse, they tend to demand higher returns from all assets, including bonds and gilts,” he says.

What are Gilts?

Gilts are bonds issued by the UK government. The term "gilt" refers to the fact that the bonds were originally issued with a gilt edge, meaning that the edges of the bond certificates were finished with a thin layer of gold.

Gilts are considered to be among the safest investments because they are backed by the full faith and credit of the UK government, which is considered to be highly creditworthy.

In September, the mini-budget triggered a huge sell-off of Gilts and yields (the interest rates paid on the bonds) surged.

As Roche points out, yields on 30-year Gilts “rose to a peak of 4.99% from just 1.1% at the beginning of the year.” While the market has since calmed down, yields remain elevated.

Investors can buy a 30-year Gilt today with an interest rate of 3.4%. That’s a lot better than the rate on most savings accounts - especially if you’ve got a large lump sum to invest.

Is it time to buy Gilts?

So, could this be a good time to buy Gilts for income?

“Currently, the bond yields on offer are proving tempting for many investors, particularly in comparison to holding cash, the value of which is still being eroded by inflation despite higher returns,” Roche notes.

With the risk of a recession also growing, bonds could be a “safe bet” for investors seeking income in times of uncertainty.

For many, high quality bonds could represent a good value source of income, especially if stock market investors are hit by recession as we’d expect – in times of financial crisis, many revert to buying bonds as a so-called ‘safe bet’.

“Furthermore, bonds can be held in tax wrappers, such as ISAs and SIPPs,” Roche notes and “Even when held outside tax wrappers, most bonds are not liable for Capital Gains Tax,” he adds.

These tax advantages could be significant for investors, especially when “bonds are purchased below the redemption price paid to the holder on the maturity of the bond.”

It could be time to buy bonds, but there are risks

Still, as is the case with any investment, there are still risks.

“Despite the relative return to calm, in the medium term, there is likely to be continuing volatility linked to market expectations of inflation and interest rate movement, and a related risk premium remains,” Roche notes.

What’s more, there’s a “dizzying array of corporate and government bonds with a range of names, maturities and coupon prices,” so it’s important investors know what they’re buying before getting involved with any particular security.

There are some other benefits of higher bond yields, which are also worth considering. “They will, in turn, boost yields elsewhere, such as annuities. That is potentially good news for savers and retirees, for example,” Roche summarises.

UK government bonds – usually referred to as ‘gilts’ – have been at the heart of some of the biggest financial stories in recent years. Gilt markets almost single-handedly ended Liz Truss’s government in 2022, and they threatened to dislodge Labour chancellor Rachel Reeves from her position early in 2025.

“Gilt” is shorthand for a bond issued by the UK government. In other words, gilts are units of government debt.

“They're essentially loans to the UK government,” said Sarah Coles, head of personal finance at AJ Bell. “You lend them money for a specific number of years, in return for a regular payment known as a coupon.”

This coupon payment is fixed and is often expressed as a percentage of what you paid for the gilt. This is known as the ‘yield’ – exactly the same as the yield on other forms of bond.

“When they mature, the government repays the full face value (known as par value and usually £100) to whoever holds the bond,” Coles added.

Gilts are used by the government to raise money from investors to fill the gap between revenue (taxes) and spending. This makes them central to the financial system, and a key part of how the UK economy functions.

“Generally, gilts are used to borrow to improve infrastructure and fund other longer-term projects that aim to benefit the economy through higher growth and productivity,” said Rob Morgan, chief investment analyst at Charles Stanley.

The average life of a gilt is 14 years, though yields on 10-year gilts are generally tracked as the headline figure when discussing gilt yields.

Because the coupon payment is a fixed amount, the yield (which is a percentage of the price of the bond or gilt) moves in an inverse direction to the price. So in the chart above, which shows price, points where the line is lowest means that the yield is highest, and vice versa.

This matters for the UK economy because the yield on a gilt is effectively the interest that the government pays on its debt. The lower gilt prices go, the more expensive it is for the government to raise money.

How do gilts work?

The government issues bonds via the Debt Management Office (DMO), which is responsible for managing gilt supply and demand and deciding what sort of gilts to issue.

There are various ways of buying gilts. Some investment platforms allow you to buy them directly, but if you aren’t able to do so you could buy an exchange-traded fund (ETF) that tracks the performance of government bonds or gilts.

“[Gilts] can either be bought at issue or in the secondary market,” said Morgan. “Buying at issue means that you get the same ‘yield’ on the bond as the coupon. For instance, if a bond is issued with a 4% coupon you’ll receive £4 of interest for each £100 invested every year until maturity.

“However, if you buy in the secondary market, the gilt may be trading either above or below its ‘par’ value and the return generated could be higher or lower.”

Par value is defined as the face value of the bond – i.e. the amount the borrower is required to repay on the maturity date.

The DMO determines the price of new gilts issued based on market conditions, and yields are one of the key variables that are considered when pricing them.

The question of whether or not gilts are a good investment depends largely on market conditions, as well as your individual circumstances and the role they are likely to play in your portfolio.

Should you buy gilts?

The key advantage of gilts, like other forms of government bond, is that they are a safe investment. The UK government has never defaulted on its debt, and it is hugely unlikely that it ever would.

Rather than default, the government would be more likely to take actions that devalue the value of the pound (in which all gilt coupons are paid), which would diminish the real returns that the gilt holder received over time.

For that reason, two key variables that impact gilts are interest rates and inflation.

You are paid the same amount of money on your gilt regardless of what is happening with inflation: rising costs eat into the real value of this yield. So inflation makes gilts less appealing.

Inflation also tends to lead to higher interest rates, which makes it more likely that investors can find a superior return elsewhere.

“Investors don’t wish to see a below-inflation return on their money, so they want compensation for the risk of inflation being higher than expected – and this ‘term premium’ particularly affects longer term gilt prices,” said Morgan.

For this reason, gilt prices tend to fall, and yields rise, when interest rates go up, and vice versa.

So the ideal time to buy gilts is one where yields are high, but where interest rates and inflation are expected to fall in future.

Yields on ten-year gilts fell to 4.37% – their lowest level since 2024 – on 12 January, and continued to fall further over the following weeks. But when the war in the Middle East started in late February, fears of inflation rose. That raised expectations of higher interest rates, which saw a fall in gilt prices – and, as such, a rise in gilt yields.

Ten-year gilts currently yield around 4.76% (as of 15 April), but they yielded as high as 4.95% in late March.

The latest UK inflation data showed that CPI rose by 3% in the year to February. That means that gilts are currently yielding around 1.78% in real terms (adjusted for the impact of inflation). However, inflation data always comes with a lag – the next UK inflation release date is 22 April, and this will cover March data, which is likely to come in higher thanks to the impact of the conflict.

What are the tax advantages of gilts?

Another reason to consider investing in gilts is that they are tax-efficient.

“Frozen tax thresholds and the looming cut to the cash ISA allowance mean it’s getting harder to keep your savings interest out of the clutches of the taxman,” said Coles.

Coles believes that now is an opportune time to buy certain gilts.

“Gilts with low coupons, issued during the pandemic and set to mature soon, tend to be priced below their par value,” she said. “At the time of writing, for example, there’s one due to mature in January 2028 with a coupon of just 0.125%, priced at £93.20. On its maturity date you’ll get £100 for every £93.20 you put in. The monthly payment is small, so the lion’s share of the gain is the difference between what you pay for it and what you get back when it matures.”

The coupon is taxed as income – but that is a small part of the return on these gilts.

“The rest is the rise in the value of the gilt between when you buy and when you are repaid, and this is free of capital gains tax. It means most of your gain is tax-free.”

How do gilts affect your finances?

The interest rates on gilts set prices for things like mortgages, financial derivatives and can dictate government budgets. They are essentially the foundations of the country’s financial system.

When gilt yields increase, the government pays more interest on its debt. This eats into its budget, meaning less money available for tax cuts or public spending, assuming everything else remains constant.

The UK has around £2.9 trillion of gilts outstanding. While many of these have fixed interest rates over several decades, it’s easy to see how even a small increase in gilt yields can have a huge impact on the country’s financial position.

They are also a significant driver of borrowing costs. For instance, in late 2024 and early 2025, some mortgage lenders increased their rates as gilt yields rose, even though interest rates had been trending downwards.

However, higher gilt yields tend to be good news for annuities.

“The higher the gilt yield the bigger the potential regular retirement income,” said Morgan. “If you have been contemplating buying an annuity with your personal pension pot, it might be an opportune time to take a fresh look at available rates.”

Twenty-one years ago, John Ralfe, then in charge of the £2.3bn Boots pension scheme, took the momentous decision to sell all the fund’s £1bn of equities and invest solely in UK government bonds.

The advantages, he later explained, were that in doing so, he matched the assets of the fully funded defined-benefit scheme to its liabilities, reducing the risk for Boots’ management and shareholders of a future deficit that the company would have to make up. It also reduced the risk for the 72,000 members, lowered investment costs by 97% and, by selling early in the bear market, avoided large equity losses.

Liability-driven investment (LDI) was born and other companies rushed to follow suit, especially those that were fully funded and closed to new employees. New staff were instead offered defined-contribution schemes in which they, not the company, took the investment risk. Companies found an added attraction in that having matched assets to liabilities, they could offload responsibility for the scheme entirely to asset managers such as Legal & General. They earned well from selling LDI.

Gearing up with derivatives

Sceptics noted that without knowing how long the members would live, matching assets to liabilities was an actuarial estimate, not a certainty. More importantly, there weren’t enough long-dated gilts to match the liabilities, so it was just assumed that the proceeds from maturing gilts could be reinvested at the same yield. If yields fell, as they did until 2021, a gap between assets and liabilities would open up and the scheme could become underfunded.

Nevertheless, so popular did LDI become that sponsors extended it to underfunded schemes. The cunning plan (in the Blackadder sense of the phrase) was to invest not in physical gilts but in “swaps” – derivative contracts giving artificial exposure to the gilt market through financial counter-parties such as investment banks. The advantage of this was that even with the required collateral, much less capital needed to be invested, thereby freeing capital to be invested in other assets in an attempt to catch up on the shortfall.

In effect, this meant leverage (ie, borrowing) as the gross exposure to investments was higher (potentially a multiple of) than the asset base. This was fine so long as gilt yields fell and the swaps generated profits, so the success of the model led to it expanding to cover £1.5trn of assets. The switch into LDI is likely to have driven gilt yields to unsustainable lows (0.68% for ten years at the end of 2021) and the selling of UK equities may have depressed valuations.

LDI funds took on more risk than they thought

Simon Wolfson, CEO of Next, not only refused to switch the Next scheme to LDI but wrote to the Bank of England in 2017 that LDI strategies “always looked like a time bomb waiting to go off”. The Bank of England cannot say it wasn’t warned.

Wolfson’s view that LDI funds “are actually taking a lot more risk than they thought they were” has been borne out as gilt yields have risen. The ten-year gilt yield reached 2% in May, 3% in early September and broke 4% as Kwasi Kwarteng announced his poorly-timed mini-budget. It peaked at 4.5%.

The crash in bond markets was a global phenomenon but was exacerbated in the UK not by the mini-budget but by an avalanche of selling by LDI schemes. As gilt yields jumped and the losses on their swap contracts mounted, they were forced to sell what physical gilts they had in order to provide more collateral, and the sell-off turned into a rout.

The Bank of England stepped in with a pledge to restart quantitative easing and buy up to £65bn of gilts to stabilise the market. Ten-year yields have since fallen back below 4%. But the crisis is far from over.

Gilt yields won't return to huge overvaluation

Firstly, the liquidity provided by the Bank of England increases the money supply and will filter through into higher inflation and hence higher gilt yields.

Secondly, the LDI schemes in trouble may have been able to put up collateral and hence avoid insolvency, but the losses remain. It is inconceivable that gilt yields will return to 2% let alone 1%, and even 3% is an optimistic target, requiring inflation to return sustainably to 2%. Bond markets in general and gilt yields in particular are extremely unlikely to ever return to massive overvaluation.

So what can the managers of all those schemes that are under water do? They have a series of unpalatable choices. They can admit that the LDI scheme has failed and go cap in hand to the government for a bailout. They can seek to reduce the benefits to members for which they are contractually liable. They can seek to pass the scheme on to the already overstretched Pension Protection Fund. Or they can seek to make up the shortfall by switching the fund to invest in supposedly higher-risk, higher-return assets such as equities.

As architects of yet another mis-selling scandal, they and their companies can expect no mercy from the media, the regulators, the government, public opinion or, perhaps, the courts. As one shrewd observer points out, “all the mis-selling scandals have come about from those who claim to be reducing risk actually doing the opposite”.

Following the Truss-Kwarteng mini-Budget of 23 September, which was widely deemed fiscally incontinent, the market for UK government bonds (gilts) took fright. Demand for long-dated gilts fell sharply and rapidly, meaning their price slumped and gilt yields (which move inversely to prices) soared.

The consequences for the mortgage market were severe: fixed rate mortgages soared and some lenders withdrew from the market altogether in order to reprice. The political consequences have been turbulent, with the weeks-old Truss government looking painfully unstable.

But what has received less attention – in the melee of recriminations, infighting and policy U-turns – is the role of one particular investment strategy, liability-driven investment (LDI), in forcing the Bank of England to step in and stabilise the gilt markets by buying UK debt.

What is liability-driven investment (LDI)?

LDI is a risk-management strategy used by pension funds, in particular “defined-benefit” funds (final-salary schemes or similar). Obviously, all pension funds have to manage their assets, whether bonds or stocks or other holdings, to ensure that they can always meet future liabilities, namely the monthly payouts to pensioners.

LDI is an increasingly popular investment strategy that uses derivatives to help pension funds match assets and liabilities, in order to minimise the risk of an unforeseen shortfall. In effect, the derivatives (such as interest-rate swaps and other contracts) are intended to hedge the movements in liabilities caused by changes in inflation and interest rates.

Is LDI a bit dodgy?

It’s not some outré tactic, no. Typically, big-name financial institutions including BlackRock, Legal & General and Schroders manage LDI strategies on behalf of pension clients. In addition, there are specialist firms, like Cardano and Insight Investments.

According to the Investment Association, the amount of pension-fund liabilities hedged by LDI strategies was worth about £400bn in 2011, but had quadrupled to £1.6trn by 2021. Even so, there have been warnings of the risks if the era of ultra-low rates should end abruptly.

So what went wrong?

The way LDI works is that to arrange coverage, funds put up collateral – and if yields rise, they have to top up that collateral because the underlying asset, the gilt, is worth less. Normally, funds can easily meet this margin call: they have liquid assets and cash, and usually have days or weeks to make the payments.

What went wrong was that “yields rose so sharply that managers had to come up with the cash in a number of hours”, says Huw Jones on Reuters. Many funds didn’t have enough spare cash, so to meet the calls they “went to their next most liquid assets: gilts, with funds typically holding a lot of the longer-term, inflation-linked variety”.

But this is where the so-called “doom loop” comes in. Because so many funds were simultaneously selling gilts to meet payment demands, yields were pushed higher. And that in turn increased the collateral payments they had to make. And so on, through days of wild rumours about the scale of liabilities, and fears of contagion to other asset classes – until the Bank of England stepped in to stop the cycle.

How did it do that?

By promising to spend up to £5bn every day until 14 October – that’s 13 business days and a potential outlay of £65bn – on buying UK long-dated gilts, if needed, to stabilise the market by keeping yields down. So the bank has restarted its quantitative easing (QE) programme, whereby it buys bonds with printed money.

That headline figure, and the complexities involved, led to the widespread misapprehension of a £65bn state bailout of pension funds. In fact, up to Tuesday of this week, the central bank had so far needed to shell out less than £4bn on its temporary gilt purchase programme.

That doesn’t mean all worries are over. Gilt yields did fall sharply again in the wake of the Bank’s commitment, but they were rising again this week. As of now, there’s no knowing what the final bill will be, nor what will happen in the market once the purchasing period ends.

What can we learn from this?

Even if this bailout ends up costing the Bank of England nothing – as it sells back those long-dated gilts in an orderly manner – it has exposed the manner in which the defined-benefit sector gains from an implicit taxpayer guarantee denied to those who don’t enjoy such pensions.

After the financial crisis, banks paid for their implicit taxpayer guarantee by being hit with an extra tax, says Patrick Hosking in The Times. “There may be a case for defined benefit schemes... to be treated the same way”.

More broadly, the LDI blow-up may be a “harbinger of much bigger problems... in the way the government funds its ever-growing borrowing needs”, said Jeremy Warner in The Telegraph.

What are these problems?

UK pension funds are by far the biggest buyers of UK government debt; £1.5trn of the pension industry’s £2.5trn of assets is held in the form of high-grade bonds – mostly UK gilts. That’s not a good thing: over-investment in bonds that finance current government spending – rather than equities that drive business expansion – is ultimately a “curse on growth and productivity-enhancing investment”, says Warner.

Defined-benefit schemes are now in long-term run-off – and will “eventually become net sellers of gilts rather than net buyers”, which raises its own challenges. Unless the government offers much higher returns, it is unclear why the “next generation of ‘defined contribution’ pension provision would want to [invest] in government debt in quite the same way”. All this is “one more reason... for worrying about [our] irremovable budget deficit”.

The most interesting part of any crisis isn’t the blow-up that you expected – it’s the one you didn’t see coming. The latest development in Britain’s plan to turn itself into an especially chaotic emerging market is that the Bank of England has been forced to intervene in the bond market to prevent the sell-off in long bonds from creating a disaster for pension funds.

Yields on 30-year gilts soared from 3.5% last week to 5% this week, as markets digested the likelihood of more bonds being issued, the prospect of higher interest rates and the way that UK economic policy was looking a bit Marxiste, tendance Groucho.

This is a gigantic move in bond terms, to put it mildly, and one that caused no small amount of grief for defined benefit (DB) pensions.

How rising bond yields can hurt pension funds

This sounds counterintuitive, since higher yields make the present value of pension-fund liabilities lower. In simple terms, they’d need fewer assets now to cover the payments they have pledged to make in future, because bonds – DB pension funds are big investors in bonds, even at the terrible yields we’ve seen for over a decade – now have higher yields and thus will bring higher returns.

However, DB pension funds also use interest-rate derivatives to hedge their sensitivity to changes in rates and better match their liabilities and their assets. Their derivative positions were backed by collateral – eg, long bonds. The massive increase in interest-rate expectations combined with the drop in the value of bonds (as yields go up, bond prices go down) created huge margin calls for these funds and obliged them to post more collateral against their derivative positions.

This didn’t mean they were bust – these positions were intended to hedge liabilities and so should eventually net out – but they had an immediate need for liquidity that was very hard to meet. This may have forced some of them to liquidate positions, worsening the sell-off in long bonds and driving yields higher, creating a feedback loop. Hence why the central bank had to intervene urgently.

What can investors learn?

Very few investors had this on their crisis bingo card (I didn’t, and I worked in pensions two decades ago… hedging wasn’t so big back then). The direct implication for anybody not running a pension fund is limited, but the wider lesson in the unexpected effects of higher interest rates is not.

For example, many investors favour value stocks in an environment of higher inflation and interest rates, for reasons that make perfect sense. But today, many seemingly cheap stocks carry high debts or have weak cash flow. How will they cope when they have to refinance debt at higher yields?

That’s why value investors should still look for solid businesses at this stage of the cycle. The time to buy cheap junk will be after the defaults kick in.

The annual conclave of central bankers at Jackson Hole, Wyoming, is usually only of interest to the nerdiest of market watchers and economists who relish the micro-analysis of the carefully scripted wording of speeches and press releases. But this year was different.

Having raised interest rates this year by 2.25% to a target range of 2.25%-2.5%, the Federal Reserve, America’s central bank, had been expected to “pivot” to a more dovish stance. This might mean that the 0.5% increase in September would be the last, or that the increase would be 0.25%, or that there would be no increase at all.

Instead, Jerome Powell, chair of the Federal Reserve, reiterated the need to bring inflation down by pushing up interest rates whether it caused economic pain to households and businesses or not.

Why the Fed has changed its mind on interest rates

What caused this apparent change of mind?

Not the rate of inflation, which fell from 9.1% in June to 8.5% in July while the core underlying rate fell to 5.9%. Inflation is expected to have fallen further in August and economic indicators point to a further fall in the coming months.

Instead, Powell appears to have reacted to the bond market. The yield on ten-year US Treasury bonds rose from 1.5% at the start of the year to a peak of 3.5% in mid June before falling to 2.6% at the end of July. Since then, it has risen to 3.1%, indicating that while bond yields may accept the current downward trend of inflation, they are not convinced that it will fall back to 2% and stay there.

The gap between inflation-protected and conventional bonds, regarded as a good indicator of inflation expectations over the next ten years, rose from 2.3% to 2.6% so the credibility of the Fed was at stake. The Federal Reserve, it now seems, is committed to a monetary policy that will satisfy the bond market.

The “bond vigilantes”, a term invented by economist and market analyst Ed Yardeni in the 1980s to describe a world in which bond investors drive monetary policy, are back.

It is notable that the 24% fall in the S&P 500 index between the start of the year and mid June, a period in which corporate earnings continued to rise at a brisk pace, coincided almost exactly with the rise in bond yields. So did the 17% rally to mid August, and so did the subsequent 8% fall.

Stockmarket investors are not particularly concerned about the effect any recession would have on corporate earnings because they know that corporate earnings will recover with the economy. They are much more concerned with the risk of higher bond yields, which result in lower interest rates.

If bond investors are happy, stockmarket investors are happy

This goes against conventional wisdom which claims that recessions are “bad” for stockmarkets, so markets will be undermined by higher rates. Investors want central banks to do whatever it takes to knock inflation back, regardless of the short term economic consequences. If bond investors are happy, stockmarket investors will be happy too, and the yield on ten-year US Treasuries is the best indicator of investor confidence.

Consumers and businesses do not like paying higher interest rates on their borrowings, but they like inflation even less. They do not want a recession with its attendant risk of unemployment and falling living standards but will probably accept some short term sacrifice if the result is lower inflation and interest rates, combined with a return to growth in the longer term. We are all inflation vigilantes now.

The reason US inflation is falling – and hence the economy is in good shape – is down to energy. Fracking has made the US self-sufficient in oil and gas, in addition to which the US is bordered by two hydrocarbon-rich friendly countries. Europe, in contrast, trusted its future energy needs to Russia, succumbing to anti-nuclear superstition and a Russian-backed campaign against fracking. There are few signs of policy change.

Britain lies somewhere in the middle with plenty of hydrocarbon reserves, but an aversion to exploiting them.

The UK seems intent on making the problem worse. The Bank of England has proved slow to raise interest rates with the result that sterling fell 5% in August alone. This promises to exacerbate inflation and worsen the outlook for the UK economy.

The government has the fiscal headroom to alleviate the downturn, but all the media and popular pressure is for short-term fixes which will make the problems worse.

The imperative is to reduce demand for hydrocarbons and increase supply, not to finance short-term hand-outs through borrowing and production taxes. We will soon see whether the new government will rise to the challenge.

The world follows where the US leads

Ed Yardeni notes that falls in US GDP in the first two quarters match the definition of recession but he expects the data to be revised upwards, helped by strong employment. He doesn’t “expect any downturn over the rest of the year and/or next will be severe enough to qualify as an official recession” but instead sees the continuation of a “rolling recession” passing through different sectors and regions.

As a result, he expects “S&P 500 earnings growth of -5.4% and -3.8% year-on-year in quarters three and four” which still means growth of 3.1% for the year as a whole and 9.3% next year.

That puts the S&P 500 on 18.4 times this year’s earnings and 16.9 times next. Whether that is cheap or expensive depends very much on the Federal Reserve dancing to the tune of the bond vigilantes. If it does so, US Treasuries may even be reasonable value.

The US accounts for 62% of the global stockmarket, while Japan, where inflation is just 2.5%, is also in good shape. The countries facing serious economic challenges, including the UK, the EU and China, make up less than 20% of the index. As the US goes, so will world markets.

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London’s retail bond market was launched a few years ago to help private investors buy corporate bonds. It seemed a good idea at the time – private investors in the US and Italy regularly buy individual fixed-income securities, such as tax-efficient municipal bonds. Yet it has never really taken off and in recent years new issuance has slowed to a trickle, mostly from smaller charities.

However, a few commercial issuers have stuck with the retail bond market, among them alternative lender LendInvest. It issued two five-year bonds: one in 2017, paying 5.25%, and another in 2018, paying 5.375%. Both were oversubscribed. The company has now announced a third five-year bond, this time with a substantially increased yield of 6.5%. Even in an era of sharply rising interest rates, this may appeal to some investors.

The new bond will mature on 8 August 2027. It has a face value of £100 – in common with most retail bonds – and will pay an interest rate of 6.5% per annum (£6.50 per bond), with interest paid twice yearly on 8 February and 8 August. The minimum investment at launch is £1,000, but will trade in smaller denominations after launch on the London Stock Exchange’s order book for retail bonds. The offer period for the launch is expected to close at 4pm on 3 August 2022. LendInvest is also offering holders of its outstanding bonds the opportunity to exchange them for this new issue.

Property-backed loans

The first step with a bond like this is to understand the security. LendInvest is an Aim-listed company set up 14 years ago. It makes bridging, development and buy-to-let loans. Its unique selling point is that it uses its own platform to complete loans quickly for borrowers and securitises them for institutional investors. Latest annual results showed assets under management grew 36% to £2.1bn from the year before, and adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) was up 90% to £20.3m.

The bond is being issued by LendInvest Secured Income II, a special purpose vehicle that is a subsidiary of LendInvest. The subsidiary has its own ring-fenced balance sheet that consists of a basket of property-backed loans with an average loan-to-value of around 65% to 70%. There’s a partial 20% guarantee by LendInvest, which means that if the property market collapses, the loans go into default and don’t produce enough cash to repay the bonds, LendInvest will make up the shortfall in interest or principal to a maximum of 20%.

For investors content with the underlying credit risk, the next question is whether you want to invest in a corporate bond now. In market terms, the timing looks terrible. Inflation is around 10%, so a yield below that is eroding capital. Rates are going up, which will have a knock-on effect on corporate bond values. In terms of direct competition, UK government five-year bonds now yield 1.67% so you are getting 5% uplift from a riskier lender. The S&P UK Investment Grade Corporate Bond index yields 3.9%, so you’re getting an extra 2.5% on that.

However, many investors look at retail bonds as products to hold to maturity and let the income roll in, so the effect of markets on bond values don’t matter so much. The two key points are whether you are happy with the credit risk and whether the yield on offer for the full five years is enough to reward you for taking that risk. That hinges on whether you think inflation will remain elevated for the five years and whether rates will surge and then stay there for many years.

This product is not like a savings account – your capital is at risk here. But for reference, the best rate you can get on a five-year fixed-rate savings account is 3.3%. So the LendInvest bond gives you a 3% uplift for taking extra risk. For some income-orientated investors, that will look much more attractive.

Is the rise in bond yields and corresponding fall in bond prices bad news or good news? It depends on your perspective.

In the last year, yields on ten-year gilts (UK government debt), having been barely positive a year earlier, rose from 0.5% to a mid-June peak above 2.5%, though they have since slipped back to 2.1%.

Yields on 30-year gilts have risen from below 1% to over 2.5%, resulting in a capital loss to holders of these bonds of 20%.

Given that these yields remain below those of the comparable US Treasuries (US government debt) against the historic norm, it is likely that they will continue to rise and that the multi-century lows of a year or two ago were an anomaly.

Who owns all our debt?

This is clearly bad news for holders of gilts – but most private individuals sold out long ago. Maybe some pension funds still held some, though they would be wise to keep that quiet. Insurance companies, who are heavily restricted by “solvency” rules, are significant holders of gilts, but mostly short-dated ones with little capital risk and a modest yield premium over cash deposits.

The big holders, according to the Financial Times, are now “overseas” – central banks on behalf of their governments as part of the deployment of their foreign exchange reserves – and the Bank of England, which has bought back £875bn of gilts, 45% of the total in issue.

This means that the UK government’s debt-to-GDP ratio, nearly 95% gross, is only 52% net, though that would rise if the Bank of England has to sell some or all of those gilts to rein in excess liquidity. Excess liquidity would be the result of a surge in bank lending, which has been severely curtailed since the financial crisis, but that looks unlikely to happen.

The other big loser from higher gilt yields is the government and, through them, the taxpayer who, as existing gilts mature and are refinanced, will have to pay a higher interest rate. Debt service costs, excluding those on gilts owned by the Bank of England, currently sit at £40bn per year. That’s 1.7% of national income and 4.3% of public spending. This is set to rise inexorably.

On the other hand, ultra-low borrowing costs have encouraged the government to spend vast amounts of money on vanity projects such as HS2, though, fortunately, they have not (yet?) reached the lunacy of France’s nationalisation of EDF. Curtailment of government extravagance would be positive for taxpayers and the economy, even if higher rates do raise the hurdle for private sector infrastructure spending.

Why rising gilt yields can be good news for pensioners

Other potential winners are risk-averse pensioners, who are at last seeing annuity rates rise. This means that the lump sum in their pension pots will buy a higher lifetime income – one which is completely safe from market and economic volatility – than it did a year ago. Annuity rates are estimated to have risen 23% since their low in early 2021.

The other big winners are members and providers of fully-funded defined benefit pension schemes. Notable among these is the Universities Superannuation Scheme, a £90bn fund covering over 400,000 people employed in higher education.

In recent years, the fund has been reporting mounting deficits, reaching £14.1bn at the March 2020 valuation. Assets were calculated by the actuaries to be only 83% of commitments, though calculations depend on a number of assumptions. These include: longevity, future contributions, investment returns, future pension entitlements and – crucially – discount rates. The latter, the rate at which future liabilities are discounted to the current day, are based on gilt yields.

A sensible critic might argue that there are so many uncertain assumptions as to make the conclusions highly unreliable, but the trustees have to follow the “professional” advice of the actuaries and the employers have to implement the recommendations, subject to any push-back they can exert.

The employees had seen a remorseless squeeze on their entitlements and a sustained rise in their contributions. The rise in employer contributions was passed onto them (higher education institutions having little spare room in their finances) in lower pay increases. The result was understandable fury and a series of trade union-supported walk-outs across the country.

A further squeeze on benefits was implemented at the start of April. But soon after, the Universities Superannuation Scheme announced that its 31 March valuation had shown that the deficit had fallen to just £1.6bn, making the scheme 98% funded. Moreover, this was primarily due to an increase in assets rather than to a higher discount rate, the result of higher gilt yields, reducing liabilities.

Since gilt yields rose further in the second quarter and, notwithstanding the recent decline, are likely to rise further still, the position of the Universities Superannuation Scheme and other defined benefit schemes is likely to continue to improve.

In the short term, weak markets, notably equities, will have reduced assets but these losses will be soon recovered as markets resume their long-term relentless move upwards.

Staff should now be able to look forward to a reinstatement of benefits and/or lower contributions while the financial squeeze on higher education will diminish.

The losers are the actuaries, whose reputation is tarnished, and the trustees who loyally followed them. As one bemused finance director said, “the pensions system is supposed to reduce the volatility of everyone’s exposure to the vagaries of markets but it’s done precisely the opposite.”

There is one final loser from the rise in bond yields – advocates of “modern monetary theory” (MMT) who claim that government spending should not be constrained by rising debt as central banks can just create money to finance it. This theory attracted a following among progressive economists and politicians but has now been buried.

The recent rally in bond markets helps limit the scale of necessary interest rate rises and underpins equity markets. But in the longer term, a return to yields which are moderately higher than much lower inflation would mark a return to sanity.

High-yield bonds are finally living “up to their name”, says Randall Forsyth in Barron’s: yields on debt issued by companies with lower credit ratings plunged during the pandemic, as prices rose owing to ultra-low interest rates (yields move inversely to prices).

But now yields in the US high-yield market have soared by 4.2% since the start of the year to more than 8%, says Rachna Ramachandran of GMO. “There have been only two other instances in which yields have doubled so quickly” in the past 30 years: the 2008 financial crisis and the start of the pandemic in 2020.

The yield spike has brought painful losses for existing bondholders. The iShares iBoxx ETF, which tracks US investment grade debt, is down 15% this year, with a Bloomberg index of high-yield, or “junk” debt also falling 14%. Euro-denominated corporate debt is being similarly hard hit, says Sophie Rolland in Les Échos. Down 13% in the year to 20 June, the market slump far exceeds the 4% it lost in 2008, until now the worst year on record.

As well as feeling the effect of higher interest rate expectations, European debt is being hit by the European Central Bank’s (ECB) move to stop purchasing fresh debt with printed money this month. The ECB holds nearly 15% of all investment-grade euro corporate debt following previous rounds of asset purchases. Tightening credit conditions have seen “dozens of corporate bond deals” pulled from the European market, says Ian Johnston in the Financial Times. New corporate debt issuance fell 17% in the first half compared with a year before, with European high-yield debt issuance plunging 78%.

“Bond markets have had a rough year,” says Matt Grossman in The Wall Street Journal. “Red-hot inflation makes the fixed payments offered by most debt investments less appealing.” Yet as the yields offered by corporate debt rise, investors are “giving bonds another look”. Debt issued by blue-chip firms with reliable balance sheets is appealing: “it offers higher returns than government bonds but with relatively little additional risk”.

Will defaults spread?

The key uncertainty is to what extent defaults will rise. In past downturns investors could count on central banks stepping in to ease lending conditions, says Joe Rennison in the Financial Times. Yet now, with inflation soaring, they can’t.

Credit rating agency S&P Global Ratings thinks US corporate defaults will “rise to 3% by next March, up from 1.4% the previous year”, says Julia Horowitz for CNN Business. Still, most corporate balance sheets are reasonably solid after firms “took advantage of rock-bottom borrowing costs over the past two years to stash cash and… refinance their debt”. For now, “those who trade corporate bonds aren’t overly anxious”.

The last few weeks have been a “bloodbath” for bond investors, says Rachel Rickard Straus in The Mail on Sunday. Bonds are supposed to offer “a regular, safer income and a ballast against more volatile shares”. It hasn’t worked out that way. Global bond prices, as measured by the Bloomberg Global Aggregate index, are down 10% since the start of the year. Yields, which move inversely to prices, have spiked. “UK investors ditched £2.5bn of bond funds in February alone – the biggest outflow since the start of the pandemic”.

As with so much else, the culprit is rising interest rates. “Bond issuers have to offer something even more enticing to investors than what they could get simply by putting their money in a low-risk, interest-paying account”. Higher yields mean investors who buy into bonds now are getting a better deal, but those who are already holding bonds suffer capital losses. The yield on the US ten-year Treasury bond has risen by more than one percentage point since the start of 2022 to about 2.75%. At the start of the pandemic it traded as low as 0.53%.

A short, sharp cycle

The sell-off isn’t done yet, says Thomas Mathews of Capital Economics. Interest rate rises could push up the ten-year Treasury yield to 3.25% by the end of 2022. Still, “this hiking cycle looks increasingly likely to be a sharp but short one”. Once central banks “stamp out inflation” they may need to reduce rates to support a slowing economy.

“Bond market pessimism has become so extreme that a rally is a distinct possibility”, says Mark Hulbert for MarketWatch. A few “brave advisers” are asking whether things have gone too far. Their case rests on the argument that central banks may ultimately raise rates less quickly than anticipated. Inflation may have already peaked or be about to do so, and the economy could be heading for recession, both of which would give bonds a boost.

Rising real yields

Rising nominal yields don’t tell the whole story, says John Authers on Bloomberg. With inflation roaring, the “real yield” (ie, yields adjusted for inflation) that investors can expect from bonds has stayed low for most of the past year. Real yields are a better measure of whether financial conditions are actually tighter or not. As measured by ten-year Treasury inflation-protected securities (Tips), real yields in the US had been below zero since March 2020. Yet even that is changing. Last week the ten-year Tips yield briefly crept into positive territory, before falling back again.

Negative real yields have driven much of the risk-taking in markets over the past two years, says Lisa Beilfuss for Barron’s. “A flip in real yields from negative to positive should spur a reversal in some of that yield hunting.” But that may be optimistic, says Jim Reid of Deutsche Bank. On current inflation, ten-year Treasuries are yielding -5.6%. The Tips yield is ticking higher only because investors expect inflation to fall in the next few years. “I’m still not convinced inflation falls anywhere near enough over the next couple of years for real yields to get anywhere near positive… If I’m wrong… run for the hills given the global debt pile.”

• SEE ALSO: Why food and fuel subsidies will push up debt

Before we get started today, a reminder – if you want a good excuse to be in Edinburgh on Saturday 30 April, Merryn and I will be interviewing one of the smartest people in finance, Russell Napier, to celebrate the opening of the new premises of his Library of Mistakes.

The event is completely free, but tickets are limited, and more than half of them have gone already, so be quick and reserve your spot now. I’m looking forward to it and it’d be nice to see you there.

It appears that the bond bubble has well and truly popped.

Bond investors – accustomed to steady, perhaps even “rather good by historic standards” annual gains – have experienced some of their biggest losses on record over the last year or so.

So what happens now?

Bond prices are collapsing

US long-dated Treasury prices have fallen roughly by a third since the middle of 2020, notes Louis-Vincent Gave of Gavekal. That means that “Treasuries have now taken out more than five years’ worth of gains and accumulated income, with the asset’s long-dated index back at its July 2016 level”.

Ouch. Those are the sorts of losses that might make even an equity investor wince. For a bond investor – used to the idea that these are risk-free assets, the sensible ballast weighting the flightier, riskier parts of your portfolio – it must feel like the world is falling in.

So what’s going on? As a quick reminder for those of you who glaze over as soon as the subject of bonds comes up, most government bonds pay a fixed income. So when bond prices fall, yields rise (just like the relationship between dividends and share prices).

So another way to put all this is that US long-term interest rates hit a bottom in mid-2020 and have since risen sharply.

There are good reasons for this. Ordinary bonds (as in, ones that pay a fixed income) are allergic to inflation. Why’s that? Well, if an IOU promises to pay you £5 a year, every year, with no credit risk, until it matures, how much are you willing to pay for it?

The answer is: it depends. But if you expect inflation to be high and rising in the future, you’re going to pay less than if you expect inflation to fall or even turn negative.

In the first scenario, your £5-a-year payout is losing value every year at an accelerating rate. In the second scenario, your £5 is losing value at a slower rate and if inflation turns negative, it might even become more valuable.

Put very simply, we’ve gone from an environment where investors largely believed that the first scenario was more likely than the second, to a scenario in which investors are starting to believe that the second is more likely.

So it makes sense that long-term bonds (which are more sensitive to all this stuff than short-term ones, because their value is more dependent on payouts further into the future) have dropped in value.

Also, note that it’s not just the long bond – bond prices are falling and yields are rising across the board. High-rate US corporate debt for example, notes Lisa Abramowicz on Bloomberg, now yields more than 4%, not far off its highest level since 2011.

And of course, the mountain of negative-yielding debt that became such a glaring indicator of the downright weirdness of the post-financial crisis era, has now thawed away close to nothingness, sitting at around $2.7trn, the lowest figure since 2015.

There’s more to it than simply inflation rising, it’s also about how central banks react to inflation. We last saw moves in the bond market like this in the period between late 2017 and late 2018.

That’s when the Federal Reserve, America’s central bank, started raising interest rates in the hope of getting back to something approaching “normal” again. That was aborted after China’s growth panic stopped the Fed in its tracks and we then saw long-term yields drop over the course of 2019.

Then of course we had the corona panic during which the world’s central banks flooded the place with liquidity and thus pushed bond prices higher and yields lower.

Bond prices are now largely around about where they were at the most recent bottom in late 2018. The reason the pain has been much more dramatic this time round is because they fell from a higher peak, and the decline has been more rapid than during 2018.

What might cause a rebound in bonds?

What turned bonds around last time is the Fed changing its mind about interest rate rises. Could the same thing happen again this time?

It’s worth considering, given the pleasing symmetry in the charts, if nothing else. It’s exactly the sort of area you might expect to see a rebound if you place stock in such things.

More than that, you have to think that central banks must be starting to get nervous. We had the yield curve recently signalling a recession. We have interest rates on government debt shooting up at a time when there’s an awful lot of government debt out there.

And there are all sorts of concerns about bits of the financial plumbing. The commodities sector is having many tribulations with the rising costs of insuring against price moves; the Japanese yen is cratering. These are all distress signals.

Moreover, Bank of America’s latest global fund manager survey also showed that fund managers are exceptionally gloomy about the outlook, more so than they were even after the financial crisis of 2008, which is striking.

They are also extremely worried about market fragility – in other words, they think something is set to break. And they hate bonds.

That all signals to a contrarian investor that it might be time for the tension to break and something to change. The most obvious thing would be that we get some sort of mild relief on the US inflation front (all you really need is the April figure to come in a bit less astronomical than forecast) and the Fed can nod to being a bit less hawkish and you’ll get a relief rally.

Ironically, the other thing, which Gave points out, that might give a short-term rebound to US Treasuries would be a victory for Marine Le Pen in the upcoming French election, which could see a “safe haven” rush.

Either way, I don’t think it would represent a long-term change – I suspect that this time the bond bubble really has burst for real.

On that front, I’d just reiterate that you should make sure you own some gold, and also make sure you hold some cash for the inevitable panics that will no doubt be part of the return to “normal”.

I’d just add that this is all the sort of stuff that we may well be chatting to Russell about on 30 April, so do come along if you get the chance.