Wealth in Practice - February Edition

Moneycube's Wealth in Practice newsletter provides insights, resources and tips for professional advisors in Ireland. From the financial experts at Moneycube, it features opinions, technical updates, and a focus on wealth and pensions to help you advise your clients.

This month: The short-term opportunity in bonds

The short-term opportunity in bonds

For investors with €250k+ in cash, Irish bonds look attractive over the short term.

You know the phrase: investments can go down as well as up. And nowhere was that more apparent in 2022 than in the bond, or fixed income, market. Central banks rushed to bring down rising inflation in developed markets by raising interest rates.?That led to serious losses for owners of bonds.

But now the tide is turning. And it presents an opportunity for investors looking for a safe return over the short and medium term.

So what's the opportunity?

Fixed income is finally offering... income. Over the last decade, interest rate policy has been so loose that for much of the time, no yield (or income), has been available on bonds. In fact, in many cases, investors were willing to accept a negative yield when investing a bond.?Now all that has changed.?

The bond market is governed by an iron law: when the price falls, the yield rises.

With rising interest rates, and the bond price falls we saw in 2022, yields have recently been dragged higher – towards the 3% level for high-quality debt in many cases.

In an environment of uncertainty this looks like a very attractive exposure.

There are several ways to access this trend.

At its simplest, you can allocate a portion of your assets to an investment grade bond fund. Here's one example, from Vanguard, one of the largest fund managers in the world.?This fund holds over 4,000 global bonds, with an average maturity of less than three years.?It rose more than 1% in January, having experienced a fall of more than 7% last year.

But there is an even more attractive opportunity for investors prepared to put upwards of €250,000 to work. You can invest in government bonds directly. In particular, there is currently a window in markets to purchase bonds which are due to be redeemed (or bought back by the original issuer, in this case western governments) within a relatively short time frame.?This could be anything from six months to a few years. By doing this now, it is possible to lock in a government-backed return.?That’s as close to certainty as it’s possible to get in the world of investment.

Let’s take a concrete example

Right now (mid-February 2023), you can buy German government bonds which are due to be redeemed in April of next year. They are yielding just over 2.8% if held to maturity. So if you buy and hold the bond until the German government buys it back to you, you're locking in a material return, backed by one of the most creditworthy countries on the planet.

For Ireland-based investors, the opportunity is even more interesting in the case of Irish government bonds, because capital gains on these instruments are tax-exempt for Irish residents.?Here, bonds due to be redeemed in 2026 are yielding an annualized return of 2.55%.

Considering an investor would need to achieve a guaranteed 4.3% return from a typical life-wrapped investment to achieve the same post-tax returns, it is a compelling consideration for individuals who are sitting on large cash sums.

In a world where your cash on deposit still languishes at 0.0% or near it, this could make a lot of sense for the moderate-risk investor.

We would be happy to meet with you to discuss ways in which we can support you and your clients with their wealth. Drop us a line at [email protected]