Investment trust insider on rising bond yields

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Investment trust insider on rising bond yields – James Carthew: Higher bond yields deal blow to small-cap recovery

Sliding sterling and elevated gilt yields have made for a painful month for small-cap and renewables trusts, and investors now need to be patient.

I am going to press pause on the Saba saga this week (although please do make sure you vote your shares if you own them) to look at another pressing problem affecting the investment companies market: the rising cost of government borrowing.

There was a clear narrative in markets last year, which I have been equally guilty of peddling, that inflation was more or less tamed, interest rates were coming down, and with them bond yields. That story promised good news for interest-rate-sensitive sectors, growth stocks, small caps and debt funds.

However, in recent weeks, the yield on UK government 10-year gilts has climbed to levels not seen since 2008. At the same time, the pound has been sliding relative to the dollar, although we are some way off the lows of 2022’s mini-Budget. The question is, what is the effect of this on investment trusts?

We can get a sense of what is happening by looking at index movements over the past month. The yield on 10-year gilts rose from 4.27% on 9 December to 4.89% on 13 January. The MSCI UK index is down 0.1% but, within that, large cap is up 0.8% but small cap is down 6.6%.

Within the investment company sectors, the most obvious moves have been in the net asset value (NAV) of UK small-cap trusts such as Aberforth Geared Value & Income (AGVI), which is down…    read more here