From Morningstar: 2024-08-19 05:48:00

The UK government bond yields have been adjusting downward ahead of the Bank of England’s rate cut on August 1, impacting bond investors with lower expected income. However, with the current yields outpacing inflation at nearly 3.85%, investors may still find value in UK gilts despite further expected rate cuts.

While bond yields are expected to fall further, interest rates are not likely to drop rapidly. The Bank of England projects rates to be around 3.5% in late 2027. Bond investors should focus on real yields, inflation levels, and bond maturities to make sound investment decisions.

Fixed income investments provide predictability as yields remain constant throughout the bond’s life. Despite fluctuating bond prices, owning a bond with a fixed coupon can lead to capital gains. Investors must also consider factors like yield to maturity and changes in price over time to maximize bond returns.

While cash offers capital security, long-term real returns from bonds historically beat cash. However, falling interest rates can erode savings income. Cash ISAs currently offer rates above 4% but may track falling interest rates. For those seeking fixed income exposure without direct investment, bond funds provide diversification and management strategies.

Falling yields and quantitative tightening are key risks associated with buying bonds for income. As the Bank of England shifts from quantitative easing to tightening, the selling of government bonds may lead to lower prices. Despite these challenges, government bonds remain a low-risk investment option in the UK market.



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