Bond yields and sell-off

Bond yields have risen in recent months and as the bellwether for cost of borrowing in the market, bond yield movements (and bond pricing) often cause volatility in other parts of the financial world.

Reuters provided a very useful infographic in this article, highlighting the rapid changes since 2021 in central bank rates. Indeed, bond yields are hitting highs not seen since the Great Financial Crisis

The Financial Times produced an explainer (paywall) listing the entities that could be affected by the bond sell-off.

US banks - holders of debt, they could face losses on their portfolio

European banks - similar to US banks

Insurance companies - they are another sector holding bonds to finance their liabilities

UK pensions who use Liability-driven investment strategies - they could face collateral calls, similar to the UK Gilt market blow up in September 2022. This could force them to sell illiquid securities at a haircut to meet their collateral calls. The irony is that rising rates actually favour their portfolios as it allows them to better meet their future liabilities.

Global debt markets - increased cost of borrowing

Private equity - rising borrowing costs make it harder to close deals, and as they find it difficult to exit investments, they find it difficult to service debt. Rising interest rates also impact valuations of real estate.

The above is not a complete list and some of these may not come to pass. However as equity stock-pickers, this is a useful starting point to look for risks in your portfolio.

The information provided on this finance blog is for educational and informational purposes only and should not be construed as financial or investment advice. You should always do your own research and due diligence before making any investment decisions. Any reliance you place on the information provided is strictly at your own risk. I will not be liable for any losses or damages that may arise from your use of the information provided on this blog. Remember, investing involves risks and there is no guarantee that any investment will achieve its objectives or that any investment strategy will be successful. Always consult with a licensed financial professional before making any investment decisions.