City in shock as £1.3 trillion is wiped off value of UK bonds in record sell-off
More than £1.3 trillion has been wiped off the value of UK bonds since the start of 2022 following a major sell-off across bond markets, according to new figures.
Just over £882bn has been wiped off the value of Gilts and Index-linked Gilts, which have fallen 26.4 per cent and 36.2 per cent respectively in the year to date.
In addition, the value of UK corporate bonds has fallen by £514.5bn since the beginning of the year, asset manager Collidr shared with City PM
“The unprecedented meltdown in bonds is not just causing issues for pension funds with exposure to Liability Driven Investment Strategies. The fall is also wrecking the returns for any investor with a large exposure to UK bonds,” explained Colin Leggett, Investment Director at Collidr.
“Considering bonds have been a cornerstone of many ‘conservatively’ run fund strategies, like the archetypal 60/40, many fund managers are suffering in this unprecedented unwind of UK bond positions.”
Colin Leggett
“Few individual fund managers have actually experienced a fall in the bond markets on this scale,” Leggett added.
“Many may have been caught out by the speed and aggressiveness of the sell-off and some have been slow to slash the allocation to longer duration bonds.”
“With the on-going economic and political instability, we may still only be in the eye of the storm.”
Longer duration bonds, such as those with lower coupons and/or longer periods to maturity, are more affected by higher inflation and rising interest rates.
Traditional portfolios
Leggett stressed that the continued sell-off in bonds is the latest evidence that the typical 60/40 portfolio for retail investors no longer offers sufficient protection against downside volatility.
“There has long been a misconception among some that bond prices and the price of shares are inversely correlated,” he noted.
“This led investors to believe that if shares fell then the bond element of their portfolio would offer a partial hedge against that fall. Instead, this year bonds have fallen even further than shares.”
Leggett continued: “Retail investors who thought having a traditional 60/40 portfolio would provide some degree of protection from a fall in the markets have had a very difficult 2022. During times of economic stress, assets can be correlated in ways that don’t fit with traditional ‘perceived wisdom’.”
Moreover, many institutional investors using liability driven investing strategies weren’t prepared for such extreme market conditions, he concluded.