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Bond sales triggering fears for pensions and Isas

Money Matters: by Simon Read

Published 25/05/2015

In April 2016, the state pension scheme will be overhauled
In April 2016, the state pension scheme will be overhauled

There has been a $450bn (£290m) sell-off of bonds around the world in recent weeks, and this month 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

"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 said.

To help understand the significance of the moves in the bond market, look at the jump in the yield of the German 10-year bond, explains Darius McDermott at the fund supermarket Chelsea Financial Services.

"It moved from 0.05% to 0.68%, which doesn't sound like much of a move - from an almost negative yield to something marginally higher.

"But it actually represents a 6% capital loss, which has wiped out all the 'income' for more than 10 years," he said.

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."

Mr Dennehy advises against delaying an investment if you are worried about losing out and believes interest rates will rise, along with yields on bonds.

Belfast Telegraph

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