The financial headlines this week are buzzing about rising government bond yields. Here’s a quick overview to help make sense of what’s happening and why it matters for your investments.

What’s happening in the markets?

When bond prices fall, their “yield” goes up. For investors like you, who already hold bonds, this means that the value of your bonds will have fallen recently. This is what’s happening now with UK government bonds, or “gilts,” and it’s driven by three key factors:

• Persistent inflation: High inflation (that’s rising prices) reduces the appeal of bonds since their income buys less over time. Investors sell, bond prices drop, and yields rise.
• Economic growth concerns: Slower growth and weaker government finances mean more borrowing (issuing new gilts), which increases supply, driving prices down and yields up.
• Tighter government budgets: Higher bond yields increase borrowing costs for the government, creating a tricky balance between fiscal responsibility and supporting growth.

This isn’t just a UK issue. Global markets are feeling it too, though the UK is particularly impacted due to tight budgets and sticky inflation.

What does this mean for your investments?

First things first – these ups and downs are perfectly normal and no cause for concern.

Depending on the risk-level of the portfolio you’re invested in, you might see temporary dips in value. However, bonds still play a key role in helping balance your portfolio and steadying returns over the long term. Remember, a well-diversified portfolio is made up of bonds and shares, and keep in mind shares have performed very strongly over the past 12 months. 

It’s worth noting that markets are dynamic – if inflation falls, growth improves, or interest rates decline, bond prices could recover.

As always, the best approach to long-term investing is to largely ignore the day-to-day movements of the market and stay focused on the long term.