Time to buy a bond fund? Check out 17 ideas from investing experts

Bond markets have calmed in recent weeks but investors have good reason to remain nervous after the New Year rout.

Yields from government debt have retreated from earlier highs, but concerns about inflation and the prospect of slower interest rate cuts are still prevalent.

Returning US president Donald Trump is threatening a trade war with allies and adversaries alike, and tariffs could swiftly push up consumer prices.

At home, there are worries the government’s policies and increased borrowing will keep inflation elevated and delay rate cuts.

Many investors hold bonds to diversify their portfolio, and pension savers are typically moved into them automatically as their funds are derisked in the run-up to retirement.

Both groups will have taken a hit in recent weeks. This is because higher interest rates mean the returns paid to investors for holding the bonds – known as their yields – have to increase to keep luring buyers.

That makes the yields from older existing bonds look less attractive so investors dump them, causing bond prices to plunge.

We asked investing experts to explain the bond sell-off this month, which has created opportunities for new buyers but left others sitting on losses.

They also look at the impact on corporate bonds, the potential fallout for stock markets, what to consider when buying a bond fund, and which ones are worth a look now.

Why have gilt yields increased – and is Rachel Reeves to blame?

Labour has taken some heat for rising yields on UK government bonds, known as gilts.

Measures in the Budget and recent economic weak growth have increased expectations of higher borrowing, according to Charles Stanley’s chief investment analyst Rob Morgan.

‘There are also nagging concerns that inflation is back on the rise and that interest rates will need to stay relatively high to help rein it in.

‘It’s not just a domestic issue though. The UK is being buffeted by overseas inflationary forces. There are concerns that should US President-elect Trump look to implement his tariff-led trade approach there could be a significant impact on the costs of business globally.

‘The US economy is running hotter than many predicted with possible tax cuts still to come.’

Morgan says the UK is in a relatively vulnerable position, because current and fiscal deficits are the second highest among major developed markets, only behind the US – but the dollar benefits from reserve currency status, while the UK is more sensitive to foreign investor flows.

Darius McDermott, managing director at FundCalibre, says gilt yields have risen significantly since the Budget, largely due to a substantial rise in borrowing and heightened concerns about inflation.

‘Additionally, inflation in the UK has remained stubbornly high and has yet to consistently stay at or below target levels.

‘Services inflation, in particular, has been persistently elevated, although there are now some more encouraging signs of improvement.’

Laith Khalaf, head of investment analysis at AJ Bell, says Chancellor Rachel Reeves’s maiden Budget was marginally inflationary and did increase overall government borrowing – but making her the culprit for rising bond yields is probably wide of the mark.

‘Since the beginning of October the US and UK 10-year bond yields have tracked upwards almost hand in hand.

‘Those who think the current bout of bond market jitters is down to policies announced in the Budget need to explain why there has been such correlation in the upward march of bond yields both here and in the US.

‘The new year has brought with it a focus on the incoming US president, and the potential for his trade and immigration policies to be inflationary, which has implications for both economies.’

Khalaf says bond investors might also be looking at the ‘giant stacks’ of government debt already on the books in the UK and US and saying thanks, but no thanks.

How have UK and US bond yields moved in past six months? 

What about fallout for stock markets?

In a bond sell-off, the stock market can also suffer as investors are enticed away by the rising yield from government debt, explains Fidelity International’s investment director, Andrew Oxlade.

‘Certain sectors of the stock market are likely to come under particular pressure, especially those that tend to yield higher incomes.

‘Those who buy these investments will expect a premium on top of the gilt yield, so they demand a higher dividend yield. This of course means a fall in share prices.’

Oxlade says this can affect property and infrastructure companies and funds, while gold and bitcoin may also come under pressure as investors forgo more income by holding them instead of bonds.

Khalaf says: ‘The US stock market seems pretty sanguine about rising bond yields judging by recent performance.

‘Higher bond yields should hurt share prices by increasing the cost of company borrowing, thereby depressing profits, and also raising the opportunity cost of holding equities instead of bonds (of if you prefer, the risk-free rate).’

He adds: ‘If higher yields get baked in, equity investors might start to question their exposure, especially in the US where the S&P 500 sits close to a record high.’

What about corporate bonds?

Corporate bonds are used as a way of raising money for businesses – it’s essentially a certificate of debt issued by major companies.

Like government bonds, corporate bond prices are affected by higher interest rates, because investors demand a higher premium to hold them too.

‘Rising gilt yields drag up the yields on other bonds, such as those issued by companies,’ says Oxlade.

‘The difference here is that there is the risk of losing your money if the company that issued your bonds goes bust; the extra interest you receive relative to a gilt compensates you for that risk.

‘The risk can also be reduced if you buy a ready-made portfolio of corporate bonds via a bond fund.’

But he warns that if the economy entered a severe recession there would be an increased risk of widespread company bankruptcies, which would affect funds invested in higher yield bonds issued by riskier companies.

Oxlade suggests checking the credit ratings of bonds held by your fund, with ‘A’ ratings the safest.

What if you already own a bond fund, or want to buy one?

If you have a bond fund…

Current bond investors will have nursed some modest losses after the sell-off in early January, when they fell in value by a few percentage points compared with the final quarter of last year, according to Khalaf.

Typical gilt funds will have fared better than ‘lifestyled’ pension funds – where investments are derisked in the run-up to your retirement date – as the latter invest in longer-dated bonds, he explains.

But the losses were far less steep than in 2022, when gilt funds fell by 24 per cent and lifestyled pension funds by 36 per cent, he adds.

‘We’re very, very unlikely to see such deeply negative returns given yields are starting from a much higher level, and bonds are also now paying some income, which can offset capital losses.’

Andrew Oxlade of Fidelity says: ‘Existing bond investments suffer because a rise in yields automatically means a fall in price.

‘Anyone who holds an individual bond or gilt can afford to ignore this if they are able to hold to maturity but investors in bond funds cannot do this as there is no maturity date for the fund as a whole.’

If you are a new buyer…

Darius McDermott of FundCalibe says bond funds are now at a much more attractive entry point than a few years ago.

‘If you believe the economy is slowing, unemployment is on the rise, and inflation is cooling, this could be a very good time to buy a bond fund.’

He says if you are concerned about further increases in yields, you could consider a short-duration fund which are less sensitive to them. 

But if you anticipate falling yields and are comfortable with higher risk, a longer-duration fund can lock in attractive yields.

‘In our view, government bonds represent good value at current levels. Credit spreads remain tight, and we believe investors are not being adequately compensated for the additional risks associated with lower-quality corporate bonds.’

What to consider when buying a bond fund?

‘Before taking the plunge, investors should be absolutely clear why they are investing in bonds, with a particular focus on their time horizon,’ says Oxlade.

‘It’s worth reminding yourself of the masses of data that show stock markets have traditionally returned better returns than bonds over long periods.

‘Bonds do, however, serve as a diversifier tending to rise and fall at different times to stock markets.

‘There’s no guarantee these patterns will be repeated during your investment time horizon, but it would seem remiss not to consider what’s happened before.’

James Igoe, head of the Manchester office at Redmayne Bentley, says: ‘Bond funds allow investors to delegate decisions to professional investors, who decide which bonds are sensible to own, for how long and how many.

‘Each bond fund has its own mandate – some invest in short-term bonds that mature in one to three years, while others invest in riskier bonds (high yield).

‘Some are international, which allows investors to benefit from the bond market in one or more countries.’

Igoe suggests investors selecting a fund should research how the managers previously performed through different interest rate cycles, when there have been significant moves up and down.

This will tell you if they can operate effectively in multiple market conditions.

He says you need to think about risk-adjusted performance. This means measuring the profit from an investment relative to its risk over a period of time. If a low risk investment produces the same profit as a high risk one during the period, the former has made a better return.

‘This helps investors understand whether the performance was delivered by good judgment or by luck,’ says Igoe.

‘Good risk-adjusted returns over time provide better prospects of repeatable and consistent long-term performance.’

He says the size of the fund is also important, enough to provide you with comfort but not so big that it is unwieldy and managers will make less competitive decisions.

Igoe adds: ‘It is crucial to understand the USP [unique selling proposition] of the managers.

‘Do they do things differently to the rest of the managers in their space, and has this worked to good effect in the past?’

Bond fund tips from investing experts

Andrew Oxlade of Fidelity International tips:

Legal & General All-Stocks Gilt Index Trust (Ongoing charge: 0.15 per cent)

iShares UK Gilts All Stocks Index (Ongoing charge: 0.10 per cent)

Vanguard UK Gilt UCITS ETF (Ongoing charge: 0.07 per cent)

A low cost way to get exposure to a broad array of gilts is through a tracker fund. There are a few exchanged-traded funds with lower costs.

Colchester Global Bond (Ongoing charge: 0.62 per cent)

iShares Overseas Government Bond Index (Ongoing charge: 0.11 per cent)

For broader exposure beyond the UK, investors could consider the Colchester Bond Fund. The Colchester managers select from global government bonds.

The largest holdings are US government bonds but its most recent disclosure show it also sees value in New Zealand and Indonesia with bonds from those countries making the top ten holdings.

An alternative is the iShares Overseas Government Bond Index.

M&G Corporate Bond (Ongoing charge: 0.43 per cent)

Around half the fund is in the UK and it mostly lends money to lower risk companies – a maximum of 30 per cent of the fund can be allocated to higher risk companies.

AXA Sterling Credit Short Duration Bond (Ongoing charge: 0.41 per cent)

Vanguard Global Short-Term Bond Index (Ongoing charge: 0.15 per cent)

For funds that construct a mix of global corporate and government bonds, AXA Sterling Credit Short Duration Bond fund was last year running at a near-40 per cent exposure to the UK.

The Vanguard Global Short-Term Bond Index fund is the passive equivalent.

Paul Angell, head of investment research at AJ Bell, tips:

Artemis Strategic Bond (Ongoing charge: 0.59 per cent)

A fixed income fund where the team seek to outperform the IA Strategic Bond sector through a flexible investment approach.

The fund is managed by three co-portfolio managers in David Ennett, Grace Le and Liam O’Donnell

The team work collaboratively, with each manager bringing their own expertise to macroeconomic analysis and credit selection, across high yield bonds and investment grade corporate bonds.

Waverton Sterling Bond (Ongoing charge: 0.45 per cent)

A carefully managed strategic bond fund that’s guaranteed to always be at least 80 per cent invested in higher quality, investment grade bonds.

At the helm is seasoned investor Jeff Keen, who’s managed the fund since inception in 2010. Keen co-manages the fund with James Carter, who joined Waverton from Moody’s in 2018.

The investment process is a blend of top-down macro analysis and bottom-up security selection.

Artemis Corporate Bond (Ongoing charge: 0.26 per cent)

Well-known bond investor Stephen Snowden and his team have consistently delivered outperformance for investors from both a sector allocation and security selection perspective since the fund’s 2019 launch.

The fund is typically run with more risk than its index, with its risk allocation fluctuating between interest rate and credit risk depending on the team’s views.

Aegon High Yield Bond (Ongoing charge: 0.60 per cent)

Philosophically, the fund’s co-managers, Thomas Hansen and Mark Benbow, believe passively investing in a high yield index is nonsensical given indices are weighted to the most indebted businesses.

The managers are therefore entirely index agnostic in their running of this fund, outside of the sector requirement to be at least 80 per cent invested in high yield bonds.

The fund is additionally actively managed from a top-down perspective, with the co-managers assessing the fundamentals, valuation, technicals and sentiment of the market, with the extent to which they have a positive outlook across these factors determining the fund’s beta.

HSBC Global Aggregate Bond ETF (Ongoing charge: 0.07 per cent)

A sterling denominated index tracker fund with a focus on global government and corporate bonds.

The fund seeks to replicate the performance of its benchmark index, the Bloomberg Global Aggregate TR USD Hedged index.

The index, weighted by market capitalisation, is a flagship measure of global investment grade bonds from 24 local currency markets and includes government, government-related, corporate and securitised fixed-rate bonds, from both developed and emerging markets issuers.

James Igoe of Redmayne Bentley tips:

Royal London Short Duration Bond (Ongoing charge: 0.35 per cent)

Managed by Paola Binns, this fund targets corporate bonds that mature in less than five years. This approach has proved favourable and continues to perform well. P

Paola and the Royal London team have a wealth of experience in bond markets to back the process up.

Premier Miton Strategic Monthly Income Bond (Ongoing charge: 0.45 per cent)

Managed by Lloyd Harris and Simon Prior, the fund has autonomy to invest in a range of bonds with varying maturities, including government bonds.

The team is exceptionally experienced. In an increasingly ‘passive’ sector, the firm can add considerable value by being active.

Darius McDermott of FundCalibre tips:

Liontrust Sustainable Future Monthly Income Bond (Ongoing charge: 0.56 per cent)

Managed by Kenny Watson and Aitken Ross, Liontrust Sustainable Future Monthly Income Bond combines UK corporate bonds with some government bonds to generate monthly income and modest capital growth.

We like its flexible approach, which allows the managers to shift between shorter and longer-dated bonds to capitalise on interest rate changes. The fund also boasts a strong track record of delivering attractive yields.

Man Dynamic Income (Ongoing charge: 0.81 per cent)

For investors seeking a versatile, all-in-one solution for their fixed income portfolio, strategic bond funds provide the flexibility to adapt to evolving market conditions.

In this category, we favour Man Dynamic Income. Managed by Jonathan Golan, one of the most exciting young talents in fund management today, this fund has demonstrated outstanding performance.

BlueBay Investment Grade Global Government Bond (Ongoing charge: 0.36 per cent)

With yields on UK gilts and US Treasuries surpassing 4 per cent, BlueBay Investment Grade Global Government Bond provides a stable income stream and serves as a hedge during equity market downturns.

Its low-cost structure and strong performance make it an excellent choice for investors seeking both income and security.