As investors shun government debt and focus on rising inflation rather than the risk of a recession, corporate bond funds are proving surprisingly resilient during the energy crisis.
Since the Iran war broke out at the end of February, the 10-year UK gilt yield has increased from 4.2 per cent to 4.7 per cent, as investors sell UK government debt. Government bonds tend to be less attractive in the face of rising inflation as real yields (the nominal yield minus inflation) fall. In the UK and Europe, investors have also become concerned that governments would have to borrow to help citizens cover rising energy costs, and the UK’s reliance on energy imports has made gilts particularly vulnerable.
