Inflation Fears and the Future of Bond Markets
5 October 2026
To all Financial Friends
Maintaining Your Standard of Living
Your choice to read or listen in.
As a reader of these commentaries you will know that we have persistently challenged the belief that the fixed interest market (the bond markets) remains a safe or safer haven for investors funds than alternative holdings. Traditionally, investors sell equities when they fear a market downturn and invest the redeemed funds in the bond market for relative safety. Relying on 'negative correlation' where, when equities fall in value bonds will rise in value is a strategy that has worked for many years. However, as our past commentaries have recorded the normal event of negative correlation no longer remains certain. This is why consideration of investing in specific assets has been discussed.
Here is the link for the audio commentary: Audio
The Financial Times front page heading of 15th September 26 carries the wording ......'inflation fears batter bond market.' Notice it is fear, the perception or anticipation that inflation will break out of control. Markets rise and fall against the perception of events unfolding and prior to the event feared actually happening. Always look 2 steps ahead of the market.
The default strategy used by financial advisers over many years (and often still today) has been the so called 60/40 portfolio. Here 60% of pension and investment funds have been placed in equities and 40% in the bond, fixed-interest market. Many investors so advised would find their funds still in this pattern, even though commentators are pointing to rising interest rates primarily due to USA/Iran war causing rising oil and gas prices without an end in sight. Those holding corporate and government bond funds will have seen their funds fall in value in recent times.
The Investment Association (IA) report 5 year average returns on corporate bond and government bond funds as follows: Conventional UK Government Gilt funds, a loss of 21.6% Corporate Bonds funds a loss of just 0.5% and Global Government Bond Funds a loss of 8.1% Not exactly a safe haven over the last 5 years in these troubled economic times?
Financial Friends Asset Holdings
Across the spectrum of some 11 assets and funds held by many students the evidence is that funds held in the bond (fixed-interest market) have suffered small losses over the past 6 months and even over the past 5 years. Over the last 6 months American equity funds have shown gains of +15.8%, technology funds +37.8%, and gold/silver +6.1%. UK equity funds have put on +10.3% in just 6 months. Worth adding that despite a fall in gold prices our students most popular gold/silver fund gained a staggering +239% over the last 5 years.
Welfare or War?
In past commentaries we have discussed whether budgets would allocate money to welfare or war. The question was raised as our economy lacked the funds to provide adequately for both. Prime Minister Andy Burnham is committed to solving the problem of social care at huge expense. This whilst the threat of a 3rd world war triggered by Russia, is being taken seriously and the need to protect us all demands high costs for defence of the realm. Here in the UK markets are on tenterhooks awaiting John Healey's (the new chancellor of the exchequer) budget on the 28th October. Is it possible to provide for welfare and war when we do not have the growth in the economy to provide the tax revenue to pay for both?
We cannot escape the arithmetic. We need both welfare and defence. The money must ultimately come from higher taxation, greater borrowing or reducing welfare costs. Could the October budget produce rabbits out of the hat by juggling figures to represent a less than factual picture that allows for more borrowing? This while appearing to maintain fiscal stability would be extremely worrying for the future. Yet doing so would be politically skilful keeping the public calm by avoiding welfare cuts and higher taxation - until after the next general election?
Maintaining Your Standard of Living?
How can we defend our standard of living against this background of the increasing cost of living and higher taxes?
Potential welfare cuts may need us to provide more for our own health and well-being adding to the financial stress. The solution can be found by making our money work for us in one of two ways. Firstly we are learning that these uncertain times throw up unusual profit taking opportunities by holding specific assets. See the results above. Encash profits on individual assets as they arise but retain the original investment for future profits. Encashments are normally in your bank account within three working days to pay the bills or provide life enjoyments?
Such a profit taking strategy also allows for funds taken from profits to be invested again at a later date when markets fall and investors can buy back into the market at a lower price. As markets recover this strategy will increase and leverage your profits in time. Never ever try to time the markets - you will never sell at precisely the right moment and re invest precisely at the right moment. A fall of say 10% / 15% might cause you so consider re-investing?
Secondly provide the extra income you need by investing in assets that produce a high income. Rising interest rates on gilt stock and bonds could enable you to fix a high level of income into future years. Also investment strategies that are showing dividends and income streams of 6% pa to 7% pa variable per annum are variable. The series of income maximiser funds available in the market have shown such levels of income through thick and thin over recent years. Capital values fall as well as rise yet the income stream has been remarkably well maintained. For those over the age of 55yrs the old fashioned idea of an annuity could provide a high level of income locked in for life. A separate commentary will follow highlighting several income earning strategies.
Information and Guidance
As is always the case, always feel free to use this Calendly link: www.calendly.com/yourfinancialfriend to book a time to update and talk with me and get the clarity you need for your ongoing investment decisions. Always glad to hear from you and ready to help.
Commentaries that you read in the financial press or here are not advice. Commentaries seek to provide accurate information and offer comparative insights. Our commentaries clarify and make you aware of your options and choices. What you could do, not what you should do. Information and guidance allows you to come to your own conclusions.
PLEASE NOTE: A financial or economic commentary like these, are written to explain, interpret or give an opinion on economic events and markets to help readers understand what’s happening and why it matters. Designed to help you make informed decisions of your own by making you aware of opportunities, risks and potential rewards in the market.
