Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

IT’S the bond market that’s grabbing investors’ attention this week. Stock markets may have stabilised, but things are moving fast for fixed income investors.

A bad month for bonds

The conventional wisdom says investors should leave bonds well alone when inflation is high and interest rates are rising. That makes sense: if the return on cash is rising, then bond investors demand a higher income to compensate for the small risk that governments might default on their obligations. They also need to earn more if they are worried that rising prices will eat into their purchasing power. Rising yields equate to falling prices. So, it’s no surprise, as the Federal Reserve starts to tighten, that bonds have had their worst month since 2016. The yield on the US’s 10-year Treasury bond has hit 2.5%, having been as low as 0.3% at the start of the pandemic.

Is it time to take another look?

Rising bond yields are bad news for holders of bonds. But for potential investors they naturally make bonds look increasingly interesting. The US government is extremely unlikely to fail to repay a bondholder (it can always print more money to do so) and that makes Treasuries the ultimate safe haven. If you know you will get your money back and can earn 2.5% in the meantime, that will look appealing to some investors, especially if they are worried about falls in the value of shares at a time of war, Covid and inflation. The futures market is pointing to US interest rates rising to more than 3% before returning to a ‘neutral’ rate of around 2.5% so there may yet be a better time to invest but bonds look a lot more interesting than even just a couple of months ago. At the very least they could provide some ballast to an equity heavy portfolio.

Inflation remains the key

Of course, with inflation running at nearly 8% in the US, and more than 6% here in the UK according to last week’s data, the value of a fixed income and fixed capital return will continue to be uncertain. This week’s focus is on the inflation numbers in continental Europe, with announcements due in all the big EU economies. This week’s numbers will start to reflect the impact of the war in Ukraine and rising energy costs in a region that is highly dependent on Russian supplies. Already running hot, the Euro area inflation data won’t make pretty reading.

Where next for oil?

The key driver of inflation at the moment is obviously the oil price. Comments this week from the United Arab Emirates suggest that Russia’s production of roughly 10% of the global oil supply will be hard to replace. And that means that although the oil price fell back a little at the start of this week, it could be a while before it is consistently lower than today’s $116 a barrel. That’s off the recent peak of $139 but well above recent averages.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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