Bonds and stocks are misbehaving and the market is spooked. But all is not lost…

This summer, share and bond prices have done something they are not supposed to do: gone up and down in tandem and confused investors.

Over the past six weeks, global stocks and US 10- year Treasury bonds, widely viewed as the best quality government debt, have both risen. Share prices have rallied after the latest results from businesses produced better-than-expected profits.

Meanwhile, bonds have taken their cue from economic data: the rate of inflation has fallen slightly in America, leading investors to believe that its central bank will raise interest rates at a slower pace.

When interest rates are lower, bond yields become more attractive, which in turn pushes their prices up. While this means that DIY investors have made money off both American stocks and bonds, the close correlation this summer has spooked experts.

Daniel Kemp, of data firm Morningstar, said: “This movement in the same direction has raised concern that bonds are not doing their job. There should be a negative correlation between bonds and stocks, meaning prices travel in opposite directions. This is an extremely useful tool for investors, because it means that bonds can act as an insurance policy when stocks are falling. Investors have not had this protection.”

However, share and bond prices could soon diverge again. The looming threat of a recession is expected to hit stock market investors, as compa

Stocks and bonds have moved in tandem this summer

nies report weaker profits. Meanwhile, high-quality bonds could rally as savers seek safe havens for their money.

While the traditional 60:40 split between stocks and bonds has fallen out of fashion, DIY investors should make sure that they include a mix of both assets in their portfolio, experts advised. This will protect them from further volatility.

Darius McDermott, of broker Chelsea Financial Services, recommended the M&G Global Macro Bond fund, which has returned 6pc in the past five years and yields 2pc. “This is a ‘go-anywhere’ bond fund and it has an extremely experienced manager at the helm in Jim Leaviss,” he said. “It can invest in any bond issued by governments and companies anywhere in the world.”

Paul Angell, of the research firm Square Mile, warned that DIY investors should be prepared to invest for at least three to five years in a bond fund to really benefit from its yield. “Bond prices can still fall, especially as rampant inflation influences the market. I would expect some volatility over the next six to nine months as markets adjust,” he said. “But for long-term savers, bonds look very attractive. They offer a fixed income – helpful during a recession – but you must be willing to wait if you want to fully capture it.”

Mr Angell highlighted the £440m Aegon Strategic Bond fund, which has returned 16pc in the past five years and offered a yield of 5.2pc.

“You might find that the value of this fund falls by as much as 10pc in the next few months,” Mr Angell added. “But the managers have a strong track record so we think that for those willing to wait, the yield is attainable over three years.”

Mr McDermott added that the GAM Star Credit Opportunities fund, which invests in corporate debt, was a good option for investors looking for a “unique” strategy.

“They invest in the ‘ junior debt’ of companies. In the event the business defaults, junior creditors have to wait to get their money back, which makes it riskier, but you get paid for that.

“The managers pick debt from companies where they think default risk is low, and still benefit from the higher income that comes with the bonds.”

The fund has returned 8pc in the past five years, and offered a yield of 3.9pc.

“The fund is heavily invested in the debt of financial companies, which we think is defensive when the economic outlook is uncertain. The fund’s higher yield also reduces its sensitivity to rising interest rates compared with its peers, which is particularly valuable.”

Mr Angell added that DIY investors should focus on funds that back highquality debt from robust companies and governments, as exceptionally high yields could be a trap. “Some emerging market bonds offer a 10pc yield, but there is a huge amount of credit risk in this region,” he said.

Aug