As well as political turmoil and plenty of social unrest, 2016 has also seen great changes within the financial world with crashing bond yields and stock market plummets. IG trading glossaries are an essential read if you’re to keep up with the latest news it seems!
The media has been alive with stories about UK government bonds falling to new lows, but what exactly does this mean for you and will your life be greatly affected?
Understanding bond yields:
In order to understand how changes to bonds will impact your life, it’s important to get to grips with financial jargon.
This can seem a little complicated at times, but it is actually relatively simple. Bonds, for instance, are a type of debt security. When you purchase a bond you are effectively lending money to larger organisations with the agreement you’ll get it back plus interest down the line. They are considered fairly risk-free forms of investment and, of late, people have been willing to pay record high prices for these assets.
The problem is, when prices rise, bond yields fall. In fact, the rise in the price of ten-year government bonds means yields fell to 1.14pc back in June 2016 indicating how investors value the protection offered by gilts more highly than other types of more fragile and risky investments. The only real risk involved with gilts is if inflation devalues the value of money invested and interest rates fail to keep up.
Of course, the somewhat controversial Leave result following the UK referendum has resulted in crashing bond yields with investors waging their bets that the economy will be sluggish and the chance of inflation will decrease. As always, there are many complex components to what makes bonds rise and fall, however, what does the current situation mean for you?
Realities of crashing bond yields:
While following the stock market or dabbling in binary trading may not interest you, it’s important to be aware of how crashing bond yields may impact your financial future.
Crucially, many parts of our lives are linked to the return from gilts, namely the rates paid on annuities, the insurance policies which take the money you’ve put aside from your pension and transform it into a lifelong source of income. Companies that purchase gilts do so to protect them from ever running out of money, a backup if you like. Therefore, the lower rates they get from their gilt investments, the lower pension rates they can offer which is of course bad news for anyone hoping for a sizeable retirement fund.
Similarly, company pension schemes that run on a defined benefit or final salary basis, may seem attractive but the schemes behind them also tend to buy government gilts as a way of providing safe income to people in retirement. Therefore if gilt yields fall, the pay-outs can be lower as companies try to stretch the limited funds available to them due to crashing yields.
Crashing bond yields are just one example of how vulnerable and volatile the financial world is and therefore if you plan to invest in your future (even if it means doing something simple like setting up a pension) it’s a good idea to keep up with all the latest bond developments and appreciate how they impact on you.