Understanding Fixed Interest Assets
19th April 2024
Welcome to this week's Brigantia blog where we explore the often-misunderstood asset class of fixed interest, including gilts and bonds.
In a time of rising interest rates, understanding the mechanics and opportunities within fixed interest assets is crucial.
In a time of rising interest rates, understanding the mechanics and opportunities within fixed interest assets is crucial.
Fixed interest assets, such as government gilts and corporate bonds, are loans made by an investor to a borrower. These assets typically pay regular interest payments and return the principal at maturity. The price of bonds is inversely correlated with interest rates; as rates rise, bond prices generally fall. This occurs because new bonds are likely to be issued with higher yields, making existing bonds with lower rates less attractive.
Types of Bonds and Credit Ratings
Bonds come in various forms, including government bonds, which are generally considered safer, and corporate bonds, which can offer higher returns but carry more risk. The risk level and the interest or 'coupon' paid on these bonds are often reflected in their credit ratings—higher-rated bonds pay lower interest rates, while lower-rated bonds pay higher rates to compensate for increased risk.
Recent Challenges for Fixed Interest Assets
The traditional 60/40 investment strategy, which divides assets between 60% stocks and 40% bonds, has faced challenges recently. Rising interest rates have pressured bond prices, and the prolonged low-interest-rate environment before that depressed yields, making it harder for this strategy to meet investor goals as effectively as it once did.
Looking Ahead: The Future of Bonds
Despite these challenges, the outlook for bonds could be positive as interest rates begin to stabilise or decline. Short and long-dated bonds might experience price increases if the rate hikes slow down or reverse, making them appealing once again for balancing portfolios.
For those looking to understand how fixed interest assets fit into a modern investment strategy, especially in the current economic climate, it's an excellent time to discuss your portfolio. Bonds could play a key role in providing stability and income as part of a diversified investment approach.
To learn more about how fixed interest assets can work for you, we invite you to book a free, no-obligation call with us at Brigantia.
Let’s tailor a strategy that aligns with your financial goals and market conditions.
Bonds come in various forms, including government bonds, which are generally considered safer, and corporate bonds, which can offer higher returns but carry more risk. The risk level and the interest or 'coupon' paid on these bonds are often reflected in their credit ratings—higher-rated bonds pay lower interest rates, while lower-rated bonds pay higher rates to compensate for increased risk.
Recent Challenges for Fixed Interest Assets
The traditional 60/40 investment strategy, which divides assets between 60% stocks and 40% bonds, has faced challenges recently. Rising interest rates have pressured bond prices, and the prolonged low-interest-rate environment before that depressed yields, making it harder for this strategy to meet investor goals as effectively as it once did.
Looking Ahead: The Future of Bonds
Despite these challenges, the outlook for bonds could be positive as interest rates begin to stabilise or decline. Short and long-dated bonds might experience price increases if the rate hikes slow down or reverse, making them appealing once again for balancing portfolios.
For those looking to understand how fixed interest assets fit into a modern investment strategy, especially in the current economic climate, it's an excellent time to discuss your portfolio. Bonds could play a key role in providing stability and income as part of a diversified investment approach.
To learn more about how fixed interest assets can work for you, we invite you to book a free, no-obligation call with us at Brigantia.
Let’s tailor a strategy that aligns with your financial goals and market conditions.