So far, 2022 has been a year of economic downturn. With inflation and interest rates constantly rising, the UK government’s mini-budget initiative has now come into action, causing the value of the pound to drop to record lows. These factors have contributed to a difficult year for investors. For bond investments, some of the main issues are that real returns have been squeezed by soaring inflation, and bond values have been dropping. But as rates are forecast to rise further by the end of the year, the challenging journey continues. In this blog, we’ll go over how the inflation rate has changed over the year, the latest on the global bond market, and how you can still find a light at the end of the tunnel with investment bonds.

What are bonds?

Bonds are a lending system that can help investors earn dividends. A legally binding bond certificate is issued in return for an investment and, after a given period, the bondholder’s initial payment (also known as ‘principal’) is returned with pre-agreed interest. There are normally several types of term times and payment frequencies, so you can earn dividends monthly, annually, or once the bond matures. You can find our comprehensive guide to investment bonds here.

What are the inflation and interest rates in the UK?

The UK inflation rate has been on the up for the majority of this year. Despite a slight decline in July, inflation currently stands at 9.9%, which is well above the Bank of England’s 2% target. This means that inflation has risen at nearly its fastest rate in 40 years, and it doesn’t look like it’ll stop there now that the government has announced further tax cuts.

The below chart shows how inflation has changed over the last 10 years:

Looking at the year as a whole, one of the biggest economic strains came from growing energy prices, which intensified the pressure on many households when the price cap took effect on 1^st October. As a result of the current state of inflation, the latest bank rate is 2.25%, which is considerably higher than this time 10 years ago (0.5%) and January 2022 (0.25%). Experts at Hargreaves and Lansdown explain that “As many of the drivers for these price rises are global in nature (inflation in the Euro area is currently 8.9% and in the US it’s 8.5%), it’s difficult for the UK to combat this on its own.” Perhaps some comfort can be taken in the recently revised data that shows that the UK economy grew in Q2 of this year, contrary to initial reports.

What do high inflation and interest rates mean for bonds?

Some inflation – given that it’s controlled – can be beneficial for economic health. However, the UK’s inflation and interest rates have been rising at a record-high pace, suggesting an economic struggle and possible hyperinflation. If prices rise too quickly, this can reduce consumers’ and investors’ buying power, especially now that the pound has plummeted. High inflation could be damaging for bonds as real returns could be reduced, and high interest rates could diminish their value.

Many Investors are now concerned about the impact of a possible recession on the bond market. The basic definition of a recession is two consecutive quarters of Gross Domestic Product (GDP) decline. The UK is predicted to enter a recession at the end of the year, which could last until 2024, while it could be said that the US is already in a recession, following two quarters of economic loss. A recession can have different effects on different bond types. For example, GILTS or US Treasury Bonds are often considered to be a reliable investment as they’re issued by official government bodies, while private bond-issuing companies could struggle under a recession with the risk of not being able to repay their debts.

How is the bond market performing?

The value of a bond normally reflects the interest rate, and analysts at Hargreaves and Lansdown report that “bonds sold off across the market” between May and June 2022 due to the US Federal Reserve (FED) upping interest rates quicker than expected. There has been some improvement since then, and investors remain hopeful that most of the rises are now out of the way. This has caused general bond values to change very little, with only minor dips between April and July. Unlike stock markets, which can experience significant value swings, bonds don’t tend to see such heavy changes, but they can still have their fluctuations depending on how interest rates perform.

Fixed income bond performance

Experts at Hargreaves and Lansdown explain that they have seen a mixed fund performance in the last 12 months, but it is to be expected that some do better than others. The best performing fixed income fund over the last year was M&G Global Macro Bond with a return of -1.81%. The table below shows the bond’s 5-year performance.

H&L explains that “The fund’s exposure to US dollars has helped performance over the last 12 months. The managers have been defensively positioned due to concerns around inflation and interest rate rises, and this has helped to keep losses lower than their peers. But the bonds they hold have still lost value.”

In contrast, the worst performer in the same timeframe was the Legal & General All Stocks Gilt index with a return of -14.37% due to “inflation and interest rate rises [which] resulted in the fund losing money over the period.” Here’s how the bond performed since 2017:

Recommended bonds

The below tables show the top global and UK equity income funds as recommended by the Hargreaves and Lansdown Wealth Shortlist. Funds are assessed across a range of sectors based on the fund manager, team culture, the stock selection process, and manager performance.

Global bonds

UK Equity Income Funds

Finding great returns with other bonds

Despite general uncertainty in an unstable market, savvy investors can still find many ways to meet their financial objectives through bonds. At Propiteer Capital, our Propiteer Capital Property Bond can help investors secure reliable, fixed-rate returns from high-quality property assets. Each development is cherry-picked by us and our partners, making sure that we target high-demand, robust locations, and recession-resilient assets across the UK and Ireland.

Propiteer Capital gives investors the opportunity to easily grow their money by investing in a unique portfolio of desirable property projects, with funds secured against property, providing security against your investment.

Here’s how the Propiteer Capital Property Bond compares to other bonds:

Looking at our bond versus the top UK income funds as ranked by H&L, investors can secure yields between 6.0% and 12% with the Propiteer Capital Property Bond, depending on the investment value.

As well as earning fixed-rate profits, investors can also diversify easily with Propiteer Capital as funds are used towards a diverse property portfolio, meaning that your money is spread across a variety of high-quality assets in a range of geographical locations, and with a range of terms and payment frequencies, you can choose the investment that’s right for you, so you know exactly what profits you’ll make and when you’ll get them whilst balancing your investment portfolio at the same time.

To find out more about the Propiteer Capital Property Bond and our asset classes, visit our website or get in touch with one of our friendly customer care team members if you have any questions. You can also stay up to date with our company news, project updates, and upcoming events on our LinkedIn page.

Rates are accurate at the date of publishing. For our latest rates, please visit our homepage.

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