Stop the bond market wreaking havoc on YOUR cash: Ordinary households are set to be hit laborious. Experts reveal the important actions you should take now to keep away from the worst

Squeezed households face yet more pain in the coming weeks as the bond market wreaks havoc on their finances.

Families are already battling climbing home loan costs, rising grocery prices and energy bills that could soar by hundreds of pounds a year from January.

Now chaos on the bond markets may add another dent to bank accounts. Bond investors have seen a global rout, with yields reaching multi-decade highs at the tail end of last week.

US ten-year Treasuries climbed to their highest level in 24 years, while in the UK yields on 30-year gilts climbed to 6 per cent for the first time since 1998.

At first glance, the sell-off may appear only to affect bond investors.

But ordinary households could be stung as even small changes in the bond market trigger hikes to mortgages and loans, and can even hurt your stock market investments.

Here, experts reveal the vital actions you must take now to avoid the worst – and the clever tricks you can use to profit from the bond market mayhem.

Why are bond yields rising?

Bonds are effectively government IOUs. The Government needs to borrow billions of pounds to fund its spending, and it does this via the gilt market.

Loans are parcelled up into bonds – also known as gilts in the UK – and sold to investors from financial institutions to individual savers.

Gilts vary in maturity from a few months to 50 years or longer. Holders get an annual return, known as the yield, and the face value of the bond back when it matures.

Bonds are notoriously sensitive to fears over government spending, stubborn inflation and global tensions.

Anxieties about excessive government borrowing both here and in the US are growing, which makes bond investors nervous and pushes up the yields they demand to buy this debt.

Dan Coatsworth, of stockbroker AJ Bell, says: ‘The UK and US governments both face significant borrowing requirements at a time when debt-servicing costs are rising. 

Bond investors waste no time in letting the world know when they lose faith in fiscal policy.’

Fears are also growing that inflation will rise and remain high for some time, pushed up by the disruption to oil and gas supplies caused by the conflict between the US and Iran. 

The cost of everything from food to petrol is rising.

This matters because the Bank of England is likely to hike the base rate to combat rising inflation. Financial markets expect four rises in the next year.

When inflation rises, investors typically demand higher yields on gilts.

After all, if the base rate is 4 or 5 per cent, you could get a decent rate just leaving your money in the bank earning interest.

You would need to be offered a yield a good deal higher than that to make it worth your while to buy gilts. 

Existing gilt holders may also sell off their holdings, which pushes down the price as demand diminishes – and which in turn leads to higher yields.

Lale Akoner, of investment platform eToro, says: ‘There is a lot of bond supply at the

moment and there’s not enough demand, especially for the long-duration gilts. When there’s not enough demand, it drives yields higher.’

How does it impact on my money?

Mortgages 

Hundreds of thousands of homeowners could see their monthly home loan payments surge when their fixed-rate deals end in the coming months.

More than 1.8 million homeowners are rolling off fixed-rate products this year – an average of 150,000 a month.

Between this month and December, some 450,000 homeowners are remortgaging. 

These beleaguered borrowers have already faced a blitz of rate hikes in recent weeks as lenders price in expectations for Bank of England base rate rises.

A typical five-year fix mortgage has now broken the 6 per cent barrier, according to rates scrutineer MoneyfactsCompare, and the average two-year deal is trailing closely behind at 5.98 per cent.

There have been rounds of hikes from major high street lenders including Barclays, NatWest and Santander.

A homeowner coming off an average 2.64 per cent five-year mortgage taken out in December 2021 has been paying £1,139 until now. 

If they take out a new five-year fix at 6 per cent, they would now pay £1,368 a month – a rise of £229. The bond market is closely tied with mortgage rates – so when yields go up, so does the cost of home loans.

The bond sell-off has added to that upwards pressure on mortgage deals, says Nicholas Mendes, of broker John Charcol.

Five-year gilt yields – which closely impact five-year fixed-rate mortgage deals – climbed to their highest level since 2008 last week. On Friday they sat around 0.8 percentage points higher than a year ago.

Mendes adds: ‘Lenders have already been pushing up fixed mortgage rates, and when funding costs move this quickly, changes can come within days and deals can be pulled with very little notice.

‘Further increases are likely while markets stay this unsettled.’

Homeowners coming up to remortgage can lock into a deal as early as six months ahead of their fixed-term rate ending.

Start looking before your current deal has expired to protect yourself from future rate rises.

‘This gives protection if rates continue to rise, and it does not stop the borrower moving on to a cheaper deal if rates improve before the new mortgage starts,’ says Mendes.

Investments

Investors who hold shares may think their portfolio is safe from the bond market but the current turmoil is spilling over into stock markets.

Major European indexes tumbled last week. The UK’s FTSE 100 fell by as much as 1.7 percentage points on Thursday alone, while the flagship DAX and CAC indexes also slumped.

Akoner says: ‘When yields are higher, bonds become much more of a credible competitor to stocks.’

It means that stock market investing becomes less desirable, which can cause prices to wobble. Financial companies and housebuilders were among the worst hit last week.

If you have investments in the stock market, don’t be alarmed during a bond market rout.

Coatsworth adds: ‘In any situation where we see gyrations in financial markets, you should never panic. Stick to your investment plan.

‘After payday, people tend to put a set amount of money into their Isa or pension. If you get a pull-back in the stock market, your money should buy more shares.’

You could even look to buy bonds if you are after a safer investment with a strong yield. You can read our guide to buying bonds at thisismoney.co.uk/gilts.

Household bills

Families taking out credit products such as car finance loans will also face higher payments because of the multi-week bond market turmoil.

Bills for car loans and personal loans are set to become more expensive, warns Akoner.

As bond yields and the baseline borrowing cost from the Bank of England climb, car finance companies and loan providers must now pay more to raise the money they are going to lend to customers.

They may then pass these costs directly to borrowers to protect their profit margins.

‘We are already seeing some signs of higher market rates feeding through, with the average effective rate on new personal loans rising from 9.86 per cent in July to 9.96 per cent in August,’ says Akoner.

‘Further increases are possible if market interest-rate expectations remain elevated. 

‘Taking out a loan before it is needed, however, would mean paying interest immediately, while there is no guarantee that rates will be higher in six months.’

General household finances are likely to suffer as growth becomes even more sluggish and public spending is squeezed. Shore up your finances now if you can.

To protect your wallet, Jason Hollands, of investment platform Bestinvest, says: ‘Start battening down the hatches and try to reduce expensive-to-service debts.

‘Do a thorough review of your outgoings. Distinguishing between essential spending and “nice to have” items can help uncover savings.’

He recommends scouring through the best deals for your broadband, mobile and energy bills to save money.

Savings

The sell-off is great news for savers. When bond yields climb, savings rates tend to follow.

‘The bank will invest your savings money,’ says Coatsworth. ‘So, if they can get a better rate on it in the market, they pass that on in their savings products.’

Banks also need to step up their offerings to attract customers when bond yields rise.

After all, if you can get a great yield from gilts, you will need an even better rate from a savings account to lure you away.

If you’re languishing in a poor account, snap up one of the top deals on the best buy tables.

The average easy-access account offers just 2.57 per cent, according to MoneyfactsCompare.

But you can get 4.3 per cent with Oxbury Bank. This means £17.30 more every year on a £1,000 investment.

Pensions

The bond chaos offers a major silver lining for retirees looking to secure a healthy fixed income. Annuity rates have not been this good for years.

Hollands adds: ‘For retirees considering using some or all of their pension to purchase an annuity to provide them with a guaranteed income for life, rising gilt yields might be seen as welcome news.’

Annuity rates – which determine the annual income you can buy with your pension pot – are closely linked with 15-year gilt yields.

These yields have been sitting at around 5.7 per cent in the previous few days – and even climbed to 5.8 per cent on Thursday – in levels last seen around three decades ago, says Hollands.

A healthy 65-year-old buying an annuity that doesn’t rise with inflation can secure an income of more than £8,000 with a £100,000 pot.

That’s up from the less than £5,000 if they had bought the same annuity in 2020.

An annuity is a good option for retirees worried about how the soaring inflation and economic turmoil will hit their spending money.

Speak to a financial adviser if you are thinking about buying an annuity.

There are numerous options, for example, you can use a portion of your pension to buy an annuity that covers your essential living costs.

You can also buy an annuity that pays out for a set number of years rather than for life.

Go to thisismoney.co.uk/annuities for more information about finding an annuity

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