Fixed On Bonds

Premier Miton's Bond Blog

THINKING AHEAD OF THE CURVE

Cash is still king

12 July 2023

For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

This time last year I wrote about the short end of the yield curve – those fixed income securities with short maturities and reduced price risk from movements in interest rates because of their very short duration. The Premier Miton UK Money Market Fund focuses on these types of fixed income assets, those with strictly less than a year to maturity and in some cases much less, such as overnight and 1 week deposits.

With the Bank of England raising interest rates once again last month, higher base rates are making fixed income ever more attractive. What is also making this particular part of the fixed income market quite so attractive is the shape of the yield curve in the UK:

Source: Bloomberg as at 03.07.23

It’s extremely inverted out to the 7 year point. Any investments with a year to maturity or less are yielding more than any other point on the curve. Hence we get paid the most with the least amount of price risk. There is a compelling argument to be at the short end of the curve especially when you consider the Premier Miton UK Money Market Fund B income unit class yields 5.40% for both the distribution and underlying yield* as at the end of June with a 77 day weighted average life.

Indeed, when we reflect on why the curve is this shape, it is monetary policy at work. In order to tame inflation, central banks around the globe want less investment in order to reduce the amount of activity in their economies. This will lead to lower rates and less economic growth in future. Part of this process is incentivising investors to take on less risk by parking cash at the place with the best risk adjusted return – the short end of the curve. And not in riskier investments.

Whilst we think we’ll continue to see more interest rate rises in the UK from the current 5%, we are of the opinion we are reaching the end of the tightening cycle. Against this, we are now seeing high quality banks issuing 1 year certificates of deposit at c.6.75%. To us, this is ample compensation taking into account any further additional tightening.

As the saying goes – don’t fight the central banks, especially at 5.40% yield for a 77 day weighted average life.

Risks

The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
Past performance is not a reliable indicator of future returns.
This is a standard variable net asset value (VNAV) money market fund. This type of investment is different from an investment in cash deposits and the amount invested in a money market fund can go down as well as up. This means that there is a risk of loss to your capital and any gains you make on it. This fund is not a guaranteed investment.
This fund does not rely on any external support for guaranteeing the liquidity of the fund or stabilising the NAV per unit or share.
Higher interest rates may not protect investors from the effect of inflation over time and the returns adjusted for inflation might be negative.
Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.
Forecasts are not reliable indicators of future returns.
The level of income paid may fluctuate and is not guaranteed.

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Important information

For Investment Professionals only. No other persons should rely on the information contained within.
Whilst every effort has been made to ensure the accuracy of the information provided. We regret that we cannot accept responsibility for any omissions or errors.
The distribution yield reflects distribution amounts that may be expected to be distributed over the next 12 months as a percentage of the offer price as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions.
The underlying yield reflects the annualised income generated for distribution after deducting all expenses. The yield is expressed as a percentage of the offer price of the fund as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions.
The distribution yield is the same as the underlying yield for this fund because expenses are charged to income.
A free, English language copy of the Prospectus, Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or copies can be requested by calling 0333 456 4560 or emailing [email protected].
Financial Promotion issued by Premier Portfolio Managers Limited, (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE

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