2021 provided an interesting landscape for fixed income. At the start of the year, the Bank of England were preparing banks for the possibility of negative interest rates. However, as the year progressed and inflation spiked, it became clear that increases were much more likely. After widening in 2020, credit spreads (the difference in yield between a government bond and a corporate bond of the same maturity) generally narrowed to return to below pre-pandemic levels. This could be seen as an indication of improved confidence in corporates’ recovery from the pandemic and creditworthiness, as investors demand less of a yield from corporate debt, relative to government debt.
The Bloomberg Global Aggregate Bond index returned -3.83% for the year as returns on both government and corporate bonds were lacklustre. With inflation exceeding expectations, most inflation-linked bonds had better results. The Bloomberg World Government Index-Linked 1-10Yr Hedged GBP index return for the year was 5.44%.
Although in comparison to equities, it wasn’t the year for fixed income, and rising inflation has caused some to question their current position in portfolios, they remain a valuable diversifier. Fixed income isn’t expected to be the biggest driver of long term returns but by having a spread of different issuers, types of bond, and maturity, even in the current environment, there can be return opportunities while helping to reduce portfolio risk.