Prepare for the ‘year of the bond’

Goldman Sachs says gilts, treasuries and other debt investments will shine in 2024. Lauren Almeida explains how to profit

Investment bank Goldman Sachs has named 2024 “the year of the bond”, and urged investors not to “mess it up” by missing out on the opportunity. For the best part of a decade, investors who have bet on debt have lagged behind the stock market, which has been fuelled by huge growth from the likes of Amazon and Google. But with the global economy starting to slow down, lower inflation and some forecasts pointing to interest rate cuts next year, market watchers are now in chorus – bonds are back.

So, how can ordinary investors profit? Ashish Shah, the chief investment officer at Goldman Sachs, responsible for more than $ 2 trillion (£ 1.6 trillion), said in an interview with CNBC: “What we’re seeing right now in the market is not just a slowing of the economy, but inflation that is actually coming down and that sets up a fantastic total return for the bond market.”

This is because lower inflation helps to preserve the value of a bond investment, as well as its income payments. “The simple problem that everyone has is that they actually don’t own enough bonds and they’re sitting on cash,” he said.

“But cash isn’t going to deliver any performance beyond the yield and that yield is going to come down.

“This coming year is going to be the year of bonds, so don’t mess it up.”

This rallying call may come as a surprise to some investors, as rising interest rates across the world have largely triggered a steep drop in global bond prices in the past 12 months, which in turn pushed yields to highs not seen since the 2000s. This is because when the so-called “risk-free” rate is higher, investors demand a larger reward for holding on to their bonds.

Jason Hollands, of the stockbroker Bestinvest, said that while these extraordinarily high yields put bonds back on investors’ radar, growing expectations of interest rate cuts could help them to come back down to more normal – and less risky – levels. “Since November, markets have grown more confident that rates have now peaked, and that cuts are on the way in 2024,” he said. “In America, the Federal Reserve has signalled a 0.75 percentage point rate cut next year.”

This week, the Bank of England decided to hold rates at 5.25pc, as the market prepares for a cut in the middle of next year. This could happen sooner if the economic data worsen.

“This new optimism on interest rate reductions has seen bond yields retreat significantly recently, with 10-year treasuries now yielding 3.95pc and 10-year gilts yielding 3.67pc. While these are some way off the peaks, they are still reasonably attractive given they are higher than where inflation is expected to be over these time frames.

“But what is clear is that bond yields are falling and may retreat further, so the window of opportunity to lock in these yields won’t last forever.”

Making sure some of your Isa or self-invested personal pension (Sipp) is invested in bonds is also important for diversification: this is a key investment principle that means your money is spread across different assets, so that if one falls then not all of your savings suffer.

But in order for bonds to act as a safe haven, investors must be discerning about how they invest in this market. The “fixed income” universe is far larger than the stock market – by some estimates, around twice its size. The key for most investors is therefore to focus on high quality “issuers”, such as G7 governments and investment grade corporate bonds from companies with strong finances.

Rob Burgeman, of the wealth manager Brewin Dolphin, said most DIY investors should think of bonds as long-term deposits. “You don’t have to hold them until redemption, but you know what you’ll receive for keeping them between today and the day you get your money back. The yields will go up and down depending on prevailing rates, but if you are invested for the long haul that shouldn’t matter.

“So the type of bonds you want to buy depends very much on your circumstances and what you need them for. If you are buying them for income, then a higher coupon is probably the way to go.

“For instance, the October 2025 UK gilt pays 3.7pc income and 4.6pc per year total return for non-taxpayers. In these circumstances, even a bond trading above par – its issue price – can be worth it. A gilt expiring in 2028 is priced at £101 but pays 4.5pc in income, providing an overall return of 4.26pc per year.”

Investing directly in gilts – UK government bonds – also comes with a tax advantage. Although income tax is paid on interest earned from gilts, any price gains are free from capital gains tax.

This means any increase between the price of the bond when you buy it and if you choose to sell, is tax free. If the bond purchase price is very low, then more of the total return is likely to derive from the capital increase, rather than the income. However, for those who prefer to invest via

funds, a popular option is the iShares Core UK Gilts ETF.

Corporate bonds are often riskier investments than government debt, and therefore typically come with a higher yield. “Given economic growth is expected to slow, I would be very wary about investing in high yield bonds,” Mr Hollands said. “Such as those issued by companies with weak or no credit ratings – or funds with high exposure to this part of the bond market. If we end up in recession, less financially robust companies are going to come under pressure and I would expect default rates to rise, meaning some issuers may need to skip their interest payments or, worse still, be unable to fully repay bond holders on maturity.”

DIY investors can pay a fund manager to make calls on company debt. Mr Hollands picked out the TwentyFour Corporate Bond fund, which invests in a mix of both corporate and government bonds and has returned 4pc in the past year and 2pc in the past five years. It offers a 6pc yield. He also pointed to the Artemis Corporate Bond fund, which has returned 4pc since its launch three years ago and has a 5pc yield.

Mr Burgeman added the AXA US

Short Duration High Yield Bond fund. “This is at the riskier end of the market, but is worth considering for anyone willing to stomach the added volatility. It invests in debt with less than three years until redemption and offers a 4.5pc yield. The Jupiter Strategic Bond and Man GLG Sterling Corporate Bond funds are solid standard corporate bond funds, offering 5pc and 7pc respectively. Fidelity Sustainable Money Builder Income has its advantages and offers a yield of 4pc. It should be less prone to shocks, as changes to oil prices do not really affect the companies it is exposed to.”

It is possible to invest with a fund manager who uses a “sustainable” strategy in the bond market, too. Kasim Zafar, of the advisers EQ Investors, highlighted the Edentree Responsible & Sustainable Short Dated Bond fund, which invests in the debt of companies that the manager believes make a positive contribution to society and the environment.

It yields 2pc and its top holding is bonds from Motability Operations, a business that helps people with mobility needs to access new cars, wheelchair accessible vehicles and powered wheelchairs.

‘This is at the riskier end, but is worth considering for anyone willing to stomach the volatility’