With the results of the SpaceX IPO out today, technology stocks continuing to dominate market attention, and geopolitical developments providing no shortage of headlines, fixed income has had to compete a little harder than usual for space in our client communications recently.
A lack of commentary, however, should not be mistaken for a lack of focus. Throughout this period, we have remained closely engaged with our fixed income managers and continue to monitor developments across government and corporate bond markets carefully.
While bonds rarely attract the same attention as the latest market darling, they remain a core component of Tideway client portfolios. Following a period of more muted returns, we thought it was an appropriate time to revisit fixed income performance and re-explain the rationale behind our current positioning.
Fixed Income Performance Summary:
- Since the outbreak of the conflict, equity and fixed income markets have been sending mixed signals. Equity markets remain close to all-time highs, whilst bond markets have adopted a more cautious stance.
- As highlighted in our previous communications, equity market performance has remained heavily concentrated in semiconductor-related companies. Outside of this area, returns have been far less robust, with many sectors experiencing more challenging performance.
- Fixed income returns have come under pressure as government bond yields have risen in response to concerns that higher oil prices are contributing to renewed inflationary pressures.
- Despite the movement in government bond yields, credit spreads between government and corporate bonds have been broadly stable.
UK Government Bond Yields:
The table below highlights UK government bonds with a sample of maturities ranging from one to 30 years, with the current yield to maturity of the respective government bond in the second column.
The final column in the table below highlights the magnitude of the moves in UK government bond yields since the start of the year.
- The table illustrates that rising yields have not been confined to longer-dated government bonds. In fact, some of the largest increases have occurred at the shorter end of the yield curve – where Tideway is typically positioned.
- This reflects a reassessment of interest rate expectations, with markets reducing the number of Bank of England rate cuts previously anticipated over the remainder of the year with between one and two quarter point rate hikes now priced in (The European Central Bank increased rates on Thursday by one quarter point to 2.25%).
- Whilst rising yields have created short-term headwinds for bond prices (bond prices move in the opposite direction to yields), they have also increased the level of income available to new investors and to maturing capital being reinvested.
- The sharp increase in shorter-dated yields is particularly noteworthy, as it has improved prospective returns without requiring investors to take on the additional duration risk associated with longer-dated bonds.
Tideway Fixed Income portfolio yields and duration:
The relative stability of credit spreads suggests that most of the decline in Tideway’s corporate bond-focused fixed income portfolios can be attributed to movements in government bond yields rather than any perceived material deterioration in underlying credit quality, which would be more worrisome.
- To test this hypothesis, we applied each portfolio’s modified duration (yield sensitivity) to the corresponding increase in UK government bond yields shown in the previous table.
- For example, the Diversified Fixed Income portfolio (B2) has a modified duration of c.4.39 years. Applying the increase in the 4-year gilt yield (+59.17 basis points) results in an estimated price decline of approximately 2.60%.
- This compares closely with the portfolio’s actual maximum drawdown of 2.73%, suggesting that the majority of the weakness experienced year to date can be explained by higher government bond yields rather than widening credit spreads or a deterioration in company fundamentals.
- Whilst this analysis is intentionally simplified, the consistency between the estimated and actual outcomes should provide reassurance that fixed income returns have been driven predominantly by yield movements.
Source: Morningstar 10/06/2026
Some caveats for the more informed:
- Portfolio duration is an average measure and does not capture the differing maturities and sensitivities of individual holdings (key rate durations). As evidenced in our first table, yields do not move uniformly across all maturities, meaning actual portfolio outcomes will inevitably differ from simple duration-based estimates.
- Portfolio holdings data is typically reported with a lag and may not fully reflect current positioning.
- Duration figures quoted are not taken from the beginning of the year, although portfolio duration has remained broadly stable throughout the period.
- YTD basis point moves in government bond yields, rather than yield high points have been used.
Summary Conclusion:
Recent weaknesses in fixed income markets have been driven primarily by rising government bond yields, rather than any material deterioration in, or market concerns regarding, corporate credit fundamentals.
While higher yields can lead to short-term price volatility, they also increase the level of income available to investors and improve expected long-term return prospects.
We believe the relatively high starting yields currently available should continue to provide an important cushion against market volatility and support returns over the medium term.
This is one of the major advantages that fixed income portfolios have versus the beginning of 2022, where lower income levels struggled to offset yield increases.
Since the end of March, portfolio returns have been supported largely by the income generated from underlying holdings.
For a fuller rationale on Tideway’s fixed income positioning and why we continue to like corporate bonds, please feel free to read on.
Preference for lending to corporates rather than governments:
We continue to see greater value in lending to companies rather than governments. While developed market governments have become increasingly indebted and government bonds have typically been less effective diversifiers during inflationary periods, many corporate issuers have strengthened their balance sheets in recent years.
Given that corporate bonds also offer higher yields than government bonds, we believe they currently provide a more attractive balance of income and risk for investors.
What makes corporate bonds defensive:
We also favour corporate bonds because they offer a more defensive way to gain exposure to businesses. Bondholders rank ahead of shareholders in a company’s capital structure and therefore have a greater claim on assets should a company experience financial difficulty. Unlike dividends, which are discretionary, coupon payments are contractual obligations that must be met before any distributions can be made to equity investors.
Companies also have a strong incentive to honour their debt commitments, as failing to do so can significantly restrict future access to funding and increase borrowing costs. Importantly, bond investors do not rely on companies delivering exceptional growth; they simply require issuers to remain financially sound and meet their contractual obligations.
Preference for the shorter end of the yield curve:
We continue to favour the shorter end of the yield curve, where we believe investors are better compensated for the risks being taken. Longer-dated bonds are inherently more sensitive to changes in interest rates, economic conditions and geopolitical developments, making their returns more dependent on factors that are difficult to predict with confidence. By focusing on shorter-dated bonds, we gain greater visibility over repayment outcomes and reduce exposure to uncertain macroeconomic events.
This approach allows our managers to generate returns primarily through careful credit selection, rather than relying on forecasts of interest rates or duration, while maintaining a more defensive and resilient fixed income allocation.
Preference for active management over passive strategies:
We favour active management over passive strategies within fixed income markets. Bond indices allocate the largest weightings to the biggest borrowers (either largest or most leveraged companies), meaning passive investors end up lending the most capital to the most indebted issuers. Passive strategies can also become forced buyers and sellers as bonds move between investment grade and high yield classifications, regardless of valuation or underlying fundamentals.
An active approach allows our managers to be selective, avoiding issuers where risks are not adequately compensated by prospective returns and focusing on those they believe offer the most attractive risk-adjusted opportunities. It also provides greater flexibility to invest across sectors, credit ratings and maturities, while helping to avoid the increasing concentration risk (hyperscaler debt) emerging in bond indices.
