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Fixed Income

Investments, commonly

known as ‘bonds’, have

been popular with High

Net Worth private clients

for many years.

Bonds are typically issued by governments

or by companies and pay a fixed percentage

every year until maturity. This maturity date

can vary but is typically between five and

thirty years when issued. Stable income,

capital security and a 30 year bull market

have all spurred huge growth in the size of

this market over the last few years. However,

with interest rates now rising steadily in the

US and the chance of a further rate rise in

the UK at some point during 2018, it may be

that the bond bull market is finally over and

investors will have to position their portfolios


Readers of this article may remember UK

government bonds yielding 5% before the

2008 Financial Crisis. Indeed, many will

also recall yields of 10% or even above

15% in the late 1980s. If one was fortunate

enough to have invested in a 30 year UK

government bond in June 1989, then the

final 15% coupon will be received next year.

Unfortunately, the reinvestment options are

limited: just 1.5% per annum for a 10 year

UK government bond. This compares to

a UK inflation rate of 3.6%, as measured

by the Retail Prices Index. Not only is the

upside potential for bond investments now

rather modest, should UK interest rates rise,

then the price of these bonds may actually

fall before their maturity in the future.

Of course, the global economy is doing

well and this means that bonds issued by

solid investment grade companies could

be worthy of consideration. This is true and

default rates are low, but the additional yield

offered by high quality companies is also

very low at around 0.5% per annum. These

low yields may then encourage investors into

more speculative bonds such as High Yield

(also known as ‘junk’) and bonds issued

by certain emerging markets. Whilst this is

an option, investing in these areas requires

expertise and diversification is critical, as

one poor decision could result in material


Despite these headwinds, there are still

some reasons to be cheerful: with interest

rates rising around the world, more

acceptable returns from cash deposits may

be available at some point in the not too

distant future. Further, there may soon come

a time when UK bond yields are higher and

are able to match the inflation rate. In the

meantime, we are taking a tactical approach

within our clients’ bond exposure and are

keeping maturities fairly short to protect from

the risk of rising rates.

Importantly, for clients seeking to protect

their capital from inflation, we are also

advising a meaningful exposure to equities.

This makes sense in an environment of near

zero interest rates, very low bond yields

and persistent inflation. By way of example,

the FTSE 100 index currently yields 4.5%.

This is higher than the UK inflation rate and

much higher than both UK bond yields and

cash deposits. Whilst the capital values will

fluctuate over time, starting the year with

a 4.5% dividend yield is more attractive

than the coupons that will be received

from investing in UK government bonds.

Global exposure is also important and our

Research team continues to advise clients

to gain exposure to key markets such as

US Technology stocks, Europe, Japan and

Emerging Markets.

From a local perspective, we ensure that

all of these investments are suitable for

our clients. Our particular focus is on local

residents, many of whom have relocated

from the UK and wish to avoid UK situs


Bank Julius Baer & Co Ltd, Guernsey

Branch, is licensed in Guernsey to provide

banking and investment services and is

regulated by the Guernsey Financial Services

Commission. It is a participant in the

Guernsey Banking Deposit Compensation

Scheme. The Scheme offers protection for

‘qualifying deposits’ up to £50,000, subject

to certain limitations. The maximum total

amount of compensation is capped at

£100,000,000 in any five year period. Full

details are available on the Scheme’s website

or on request.

Craig Allen

Head of Investment Management

Julius Baer Guernsey


T 01481 746461