Rush to Annuity and Bond Funds as Gilt Yields Soar

There has been speculation and turmoil in both the UK and USA in bond/gilt markets with yields rising.

Bonds and Gilts

Are loans to governments.  It is how all governments borrow money e.g., from pension funds that lend your pension money (if in a bond/gilt fund) to governments for a secure rate of return.  The interest rate/coupon that is paid by a government s linked to its perceived strength and ability to meet its debts

Rising Yields

Means governments are having to pay more interest *bond/gilt yield) to borrow.  In the case of the UK and USA, perception is that recession is coming, inflation will remain high and therefore central bank interest rates will remain high.  Therefore, government borrowing costs are expected to be higher which again impacts on public expenditure and puts pressure on both the £ and the $, mean central banks may keep interest rates higher for longer to try and underpin demand and strength of their currency.

Impact of Higher Gilt/Bond Yields

Fixed interest and index linked bond fund capital values fall.  Meaning if you already hold some of these, they may fall back in value.

Investors are now attracted to bonds/gilts for the higher rates of return.  This may be a good time to invest in gilt/bond funds.

Annuity rates (these are linked to gilt/bond yields) have increased significantly meaning that if you are seeking a secure guaranteed income from your pension fund or investments, an annuity may be much more attractive now than it was during the pandemic when interest rates were as low at 0.1% pa.

Comment

Investing in gilt/bond/fixed interest funds is clearly attractive at the current time.

It is difficult to ignore annuities ‘at retirement’ as a secure income compared to flexible drawdown for pension funds and retirement income.