More than £1.3 trillion has been wiped off the value of UK bonds since the start of 2022 following a sell-off in bond markets, according to new figures released this morning.
Just over £882bn has been wiped off the value of gilts and pegged gilts, which have fallen 26.4% and 36.2% respectively since the start of the year.
In addition, the value of UK corporate bonds has fallen by £514.5 billion since the start of the year, asset manager Collidr shared with AM City
“The unprecedented bond slump is not just causing problems for pension funds exposed to liability-driven investment strategies. The fall is also destroying returns for any investor with significant exposure to UK bonds,” explained Colin Leggett, chief investment officer at Collidr.
“Given that bonds have been the cornerstone of many ‘conservatively managed’ fund strategies, such as the 60/40 archetype, many fund managers are suffering from this unprecedented unwinding of UK bond positions.”
“Few individual fund managers have actually experienced a fall in bond markets of this magnitude,” Leggett added.
“Many may have been taken aback by the speed and aggressiveness of the sell-off and some were slow to reduce the allocation to longer duration bonds.”
“With the current economic and political instability, we may still be just in the eye of the storm.”
Longer duration bonds, such as those with lower coupons and/or longer maturities, are more affected by higher inflation and rising interest rates.
Leggett pointed to the continued bond selling as the latest evidence that the typical 60/40 portfolio for retail investors no longer offers enough protection against downside volatility.
“There has long been a misconception among some that bond prices and stock prices are inversely correlated,” he noted.
“This led investors to believe that if stocks fell, the bond component of their portfolio would provide partial coverage against that fall. Instead, this year bonds have fallen even more than stocks.
Leggett continued: “Retail investors who thought a traditional 60/40 portfolio would provide some degree of protection against a market downturn have had a very difficult year in 2022. In times of economic stress, assets may be correlated in ways that don’t correspond to traditional “perceived wisdom”. »
Additionally, many institutional investors using liability-driven investment strategies were unprepared for such extreme market conditions, he concluded.
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