Bond market update and the impact on your investments


Published  20 July 2023
   5 min read

If your pension is invested in one of our Governed Portfolios or Governed Retirement Income Portfolios, some of your money will be in fixed interest investments, such as company and government bonds.

With these having gone through a very volatile period recently, we look at what’s been happening and what it could mean for your pension.

Fixed interest investments are generally considered to be lower risk than investments such as shares in companies (equities), as they tend to provide lower but more steady returns, with fewer ups and downs. Because of this, our lower-risk Governed Portfolios or Governed Retirement Income Portfolios (GRIPs) hold a higher proportion of fixed interest investments than the higher-risk portfolios.

But over the last 18 months or so, fixed interest investments, especially government bonds, have experienced a lot of volatility, and performance has been poor. This has meant the performance of the lower-risk Governed Portfolios and GRIPs have underperformed higher-risk portfolios. Understandably, this could be concerning if your pension is invested in one of these.

What’s been happening with fixed interest investments?

Events such as Covid, the war in Ukraine and the monetary policy decisions made by Liz Truss’s short-lived government have all unnerved financial markets and had an adverse impact on bond performance.

This situation has been exacerbated by a continuing period of rising and persistently high inflation that appears to defy market expectations each time figures are released, causing even more uncertainty in markets. The Bank of England is trying to control inflation by increasing interest rates, realistically the only tool available to it. But financial markets tend not to react well to shocks, and the way bonds operate is that their price will almost always fall when interest rates are rising. In this unprecedented environment, these factors combined to create a perfect storm where bond performance was extremely poor and fixed interest investments fell more in value than equities.

As the lower-risk Governed Portfolios and GRIPs have a higher proportion of fixed interest investments than the higher-risk portfolios, this poor performance resulted in them experiencing unexpectedly larger falls.


What we’ve done to help mitigate the impact

This is where having the right mix of investments comes in. The Multi-Asset team at Royal London Asset Management which manages the Governed Portfolios and GRIPs can make short-term changes to increase or reduce how much is in different types of investments (known as asset classes) to add value over the short to medium term. In 2022, the portfolios benefited from the team’s decisions to have a lower level of bonds for most of the year, reducing the impact of poor bond market performance.


What this means for you

Although it may not seem like it when looking at recent fixed interest performance, the rationale for having a portfolio with a good mix of investments and thinking longer term when it comes to investing still holds true. Having a diversified portfolio means that the impact of a single asset class or group of asset classes performing badly is likely to be mitigated somewhat by the performance of other asset classes. This is because different asset classes tend to perform differently depending on what's happening in the economy.

When considering the best mix of asset classes to have in the portfolios, the Multi Asset team uses an approach that takes account of wider economic indicators such as global growth and inflation, and considers what stage we’re at in the economic cycle (the different stages the economy goes through over time).

Last year, global growth slowed but inflation stayed stubbornly high. This is described as ‘stagflation’ by economists – a stage of the economic cycle which tends to see negative performance from both equities and bonds. So poor performance from bonds wasn’t unexpected, although the extent of the poor performance was much worse than usually experienced.

If you’re concerned that the value of your pension has fallen just before you’re planning to retire, now might be a good time to speak to your financial adviser about how you can navigate the current challenging market conditions and the options that could work best for you and your personal circumstances. For example, if you have other sources of income or cash savings, could you hold off taking money out of your pension for the time being to avoid locking in losses?


The outlook for fixed interest

On a positive note, we believe the outlook for bonds is looking brighter over the longer term.

Fixed interest investments have served us and our customers well over the long term, including during other periods of market volatility, and we believe they still have an important place in diversified portfolios like the Governed Portfolios and GRIPs.

The information in this article shouldn’t be taken as financial advice. The value of all investments can go down as well as up, and investors may get back less than they paid in. Past performance isn’t a guide to future performance.