Bonds are Down, Equities are Down, Invest Now

Across government bond markets (gilts/government debt) as well as corporate bonds, capital values have tumbled with speculation that the Bank of England may increase interest rates to 6.5% pa and possibly 7.0% pa over the coming months.  If interest rates rise, then government borrowing costs (gilt yields) also rise, pushing capital values or ‘the purchase price’ down.

In stock markets (equities), we have also seen higher volatility this week with fears across the globe that interest rates will rise further to curb inflation which could set property markets into reverse, bring on recession and also mean corporate profits falls hitting equity markets.

Speculation for UK interest rates at a 25 year high have already pushed FTSE 100 down nearly 10% since its record high in February and UK 10-Year Bond Yields at 4.66% pa (at 6pm today) compared to 1.90% pa on 24 July last year, that’s a yield increase (cost of government borrowing) of 2.76% pa.  Or put it another way if you bought UK fixed rate 10 year bonds last July your market capital value would be down 59% (that said most bond investors will be much better spread and will not have seen this sort of focused loss).

Comment

In the short term, we still expect more interest rate increases and volatility but with both bond and equity markets having taken a hit recently, we see this as a medium term investment for any ‘opportunity’ capital you may have been holding back.  Remember Warren Buffet’s attributed comment: “When people are greedy, that is the time to be fearful and when people are fearful, that is the time to be greedy.”

When looking back to the troublesome 1970s and 80s, we saw similar patterns and then markets ‘went through the roof’.  We expect new record highs to be set over the coming few years.