There has been a $450bn sell-off of bonds around the world in recent weeks, and on Monday and Tuesday there was further turmoil. Returns on bonds, which move in the opposite direction to their price, had been driven to all-time lows by worries over a European slide into deflation.
But the trend isn't only of worry to bond investors – it could end up hitting anyone with Isas or a pension. So what's happened and why could it hit your finances?
"Lots of people are trying to figure what triggered the bond falls in recent weeks," says Brian Dennehy of the advice site FundExpert.co.uk.
"But that's not really informative. Like the final snow flake on the avalanche-prone snowy slope, it doesn't inform you to understand why the final snow flake fell and triggered an avalanche – you just need to understand why it was avalanche prone in the first place."
His view is that the bond market was, and remains, constrained by liquidity problems as well as being over-sensitive because of over-valuation. "Add to this that the central bank omnipotence narrative is displaying cracks," Mr Dennehy says.
To help understand the significance of the moves in the bond market, look at the jump in the yield of the German 10-year bund, explains Darius McDermott at the fund supermarket Chelsea Financial Services. "It moved from 0.05 per cent to 0.68 per cent, which doesn't sound like much of a move – from an almost negative yield to something marginally higher.
"But it actually represents a 6 per cent capital loss, which has wiped out all the 'income' for more than 10 years. If it were to return to the heady levels of 1.5 per cent, where it stood just 12 months ago, the loss becomes more than 13 per cent," he warns.
So if you are holding bonds for total returns/capital gains, it could be the start of something more serious and you might think about switching, Mr McDermott suggests – "although you may already be crystallising those losses."
If you are holding bonds for diversification and/or income then sitting tight is an option, he says. "Their diversification benefits still hold and the yield should improve.
"The important thing is not to panic. If everyone heads to the door at the same time, it could begin a very negative cycle and incur losses and difficulties which would not otherwise occur."
Mr Dennehy advises against delaying a decision on a bond investment if you are worried about losing out. He believes that at some point interest rates will go up, as will yields on bonds, with the potential for sharp falls in bond prices. "It is sensible to assume that a good number of investors, large and small, will head for the exit once they see prices falling.
"If you hold bond funds, you will take a hit – only the size of the hit is unknown. If this worries you, panic early, sell now, as you might not be able to sell if funds suspend trading – which they can in extremis."
But he warns that your retirement savings could be hit too. "If you are in a lifestyle pension – which increases your weighting in bonds as you get older – you should be concerned. Contact your adviser or pension company urgently. Don't be fobbed off by 'there is nothing to worry about'."
Nigel Green of the advisory group deVere also warns that the bond sell-off is putting retirement incomes at risk and is encouraging workers to check out their company pension scheme and assess the risks. "It is still unclear whether we're about to enter the end of the incredible three- decade bond market rally – but what we do know is that the currently tumbling bond market is pushing company pension deficits even further into the red," he says.
"As such, the bond market sell-off is threatening the retirement incomes and ambitions of a large number of workers. So-called 'gold plated' final-salary schemes, which already have record deficits, are being hammered further because these pension funds are typically largely or wholly invested in bonds as they are perceived to be less risky than shares.
"Many people with a company pension wrongly assume their retirement incomes are safe. Perhaps they were when they joined. But this isn't the case today due to the skyrocketing pension deficits, which are now being exacerbated by a volatile bond market."
He advises investors to use the bond turmoil as a catalyst to take a closer look at their options. "Now is the time for investors to review their portfolios, to be vigilant, and to seek out the potential opportunities with a good adviser."
Some experts warn that the sell-off may continue right through until the autumn, when the US Federal Reserve is expected to lift interest rates from the near-zero levels at which they've been held at for the past six years.
It's partly this expectation that has led to some selling, as investors always sell bonds when they an get a better return on cash.
For that reason it may be wise to check out shorter-term funds – such as the Axa Sterling Credit Short Duration Bond and the Twenty Four Dynamic Bond – that have a lower sensitivity to interest rates, says Mr McDermott.Reuse content