Investors have increased their exposure to fixed income holdings by 195% over the past two years as bond yields have soared, according to Interactive Investors (II).
Including investments in money market funds – which also benefited from higher savings rates – the number increases to 247% over the period.
Of all those investments, gilts were the most popular, with holdings rising by 2,019% over the past two years.
They yield upwards of 4%, which is less than the 5.5% average on offer from investment-grade bonds, but their backing by the UK government gives them more security. Gilts have never defaulted on debt, meaning investors have greater peace of mind holding them.
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They also have the added benefits of being free from capital gains tax. Sam Benstead, fixed income lead at II, said: “Because a large part of the total yield from low coupon gilts issued when interest rates were near zero comes from the capital uplift when the bonds mature, they are a useful tool to pay less tax on investments held outside of tax-efficient wrappers, like SIPPs or ISAs.”
Although fixed income investments have risen substantially over the past two years, Benstead added that it might be a good time to increase exposure further.
With central banks likely to cut interest rates from their current highs, bond prices could rise as the fixed income they offer becomes more valuable, according to Benstead.
“Bonds are also better portfolio diversifiers today than they were before interest rates began to rise,” he said. “In the event of an economic shock, central banks now have capacity to cut interest rates to stimulate the economy, which should be good news for bond prices.”
The five most popular bond funds that investors are currently holding are iShares Core UK Gilts Ucits ETF, Vanguard Global Bond Index, Royal London Sterling Extra Yield, Invesco Monthly Income Plus and iShares Core £ Corp Bond UCITS ETF.
