UK bond market loses £1.3 trillion in value amid record sales

According to new figures released this morning, more than £1.3 trillion of UK bond value has been wiped out since the start of 2022 after a major sell-off in bond markets.

Just over £882 billion has been wiped out of the value of Gilts and Index-linked Gilts, which have fallen 26.4 percent and 36.2 percent respectively so far.

In addition, the value of British corporate bonds has fallen by £514.5 billion since the start of the year, asset manager Collidr told City AM.

“The unprecedented bond collapse is not only causing problems for pension funds with exposure to Liability Driven Investment Strategies. The decline also destroys returns for any investor with a high exposure to UK bonds,” explains Colin Leggett, Investment Director at Collidr.

“As bonds have been a cornerstone of many ‘conservatively’ managed fund strategies, such as the archetypal 60/40, many fund managers are suffering from this unprecedented resolution of UK bond positions.”

Colin Leggett

“Few individual fund managers have seen a decline in 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 reduce allocation to longer-dated bonds.”

“With continued economic and political instability, we may still be in the eye of the storm.”

Longer-term bonds, such as bonds with lower coupons and/or longer maturities, are more affected by higher inflation and rising interest rates.

Traditional Wallets

Leggett stressed that the ongoing bond sell-off is the latest evidence that the typical 60/40 portfolio for retail investors no longer provides adequate protection against downside volatility.

“Some have long had a misconception that bond prices and the price of stocks are inversely related,” he noted.

“This led investors to believe that if stocks fell, the bond element of their portfolio would provide a partial hedge against that decline. Instead, bonds have fallen even further than equities this year.”

Leggett continued: “Retail investors who thought a traditional 60/40 portfolio would provide some degree of protection against a downturn in the markets have had a very difficult 2022. In times of economic stress, assets can be correlated in ways that are not fit with the traditional ‘perceived wisdom’.”

In addition, many institutional investors using liability-driven investment strategies were unprepared for such extreme market conditions, he concluded.

By cityAM

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