…And another good year for bonds

2012 was another good year for fixed-interest investors.

The prolonged squeeze on interest rates helped 2012 to be another good year if you held corporate bond fixed-interest funds, although government bond funds were virtually flat. The performance for the main Investment Management Association (IMA) Sterling bond fund sectors is shown in the graph.

Source: FE Trustnet. Discrete performance for each calendar year to 31 December, bid-bid, net income reinvested.

Government bonds out-performed corporate bonds in 2011, but last year the situation reversed. Gilts, both traditional and index-linked, ran out of steam as buying by the Bank of England under its quantitative easing programme came to an end. Meanwhile corporate bonds benefitted from higher yields than gilts, although the volume of income-seekers buying meant that yield advantage narrowed over 2012.

What will happen to fixed-interest securities in 2013 is the subject of some debate. On the one hand, there is a feeling that from current levels, bond prices do not have much scope to rise, but they do have a long way they could fall, particularly if the UK economy starts to revive. On the other hand, there is the view that naysayers were proved wrong last year and that with the economy flat on its back as austerity grinds on, bonds remain a relatively attractive investment.

18th January 2013