Never invest in something you do not understand, as the adage goes. For wealth managers, the fixed income market has always been tricky to explain — but with recent changes in inflation, it is getting harder.
It is even more difficult still for investors to adjust to the current state of the bond market, which has gone through three distinct periods in the past 15 years. In the aftermath of the 2008 crash, yields sat at all-time lows and were not expected to go any lower. But then Covid hit — prompting waves of stimulus from central banks, causing inflation to shoot up and interest rates to rise rapidly.
The resulting sell-off in bonds led to bondholders swallowing “horrible, equity-like losses,” says Ben Seager-Scott, chief investment officer at auditors Forvis Mazars. “This unfortunately meant that the lowest risk investors took the most pain in their portfolios?.?.?.?that was really uncomfortable,” he says.