Will Bonds Ruin Your Retirement?

Added: 2026-06-02

[00:00:00]Imagine you've got two newspapers in front of you. The first reads, "Gilt yields hit highest level since 1998. The best risk-adjusted returns in 15 years."

[00:00:09]The other reads, "UK government sell-off nearly collapses pension funds."

[00:00:14]The thing is, they're both talking about the same event and true at the same time.

[00:00:20]But going forward, whose perspective is right? I mean, are bonds great value right now, or will they ruin your retirement? This is the debate happening right now between some of the biggest asset managers in the world. And it's a debate that could quietly decide whether your retirement works or not, depending on your planning. On one side, you've got Vanguard, BlackRock, the big institutional names. And they're telling you that bonds, or specifically UK gilts, now offer the best risk-adjusted returns that they've seen in 15 years or so. And the math says they're right.

[00:00:55]Now, on the other side, you've got UK retirees, who in 2022 watched the supposedly safest part of their pension fall by over 35% in 12 months.

[00:01:07]Worse than most stock market crashes, all because of inflation spike. And when we're entering a world where inflation might spike again because of the Iran conflict, energy, and a bottleneck in global supply chains.

[00:01:20]>> Prices on the rise, driven up by the war in Iran. Inflation, as uh Wolf broke this morning, has risen to 3.3%.

[00:01:28]>> The conflict in the Middle East has significantly affected the outlook for UK inflation.

[00:01:33]>> Who's right? Are the bonds the cornerstone of a sensible retirement? Or are they an asset that quietly ruins it if left unchecked? My name's George Egan, I'm a chartered financial planner and a fellow of the Personal Finance Society. I've helped thousands of people retire without worry. And in this video, we're going to go over what a bond actually is in plain English, and explaining some of the bits you might not understand. In certain environments, why that turns a safe investment to something, well, that isn't safe.

[00:01:57]And why the same crash that wiped out billions could also create the best bond valuation since 1998.

[00:02:04]So, so let me start with a story. And it's about long duration gilts. That there was a post on a UK investment forum in 2024 that really stopped me in my tracks. A son was writing about his mom. She was about to turn 70. She'd worked her whole life. And in her workplace pension, she'd been on what's called a glide path. A system that automatically moves your stocks into bonds as you get close to retirement. It was a default fund and it that is the system that the majority of UK workplace pension members are sitting in right now. It's marketed as de-risking. And in her case, the system did exactly what it was designed to do. As she was approaching retirement, it shifted her into bonds, actually gilt funds to be specific. Typically the safest of the safe, the asset she was told to protect her.

[00:02:49]And the whole idea behind that is that she would then purchase a guaranteed income for life, also very much linked to those gilt levels.

[00:02:58]Now then, 2022 happened. Her pension dropped from a meaningfully higher amount to £38,000.

[00:03:06]Now, we don't know on the post whether she was going to buy the annuity or stay in drawdown, but that is crucial.

[00:03:12]I want to be really clear. This doesn't mean that everyone in a default fund is being de-risked or even that default funds are wrong for her or for you. We just don't know based on the limited information.

[00:03:22]But it does feel a bit odd, doesn't it?

[00:03:24]Something that we've marketed as de-risking being well, so volatile. And she was not alone. There are tons of similar stories online.

[00:03:33]So, here's the question I want you to hold in your head for the rest of the video.

[00:03:37]Was the 2022 bond correction a one-off freak event due to inflation spike? Or was it a preview of more to come?

[00:03:45]Because I'm going to show you the academic data, OBR's own data, the Bank of England's warnings, and they all suggest that the underlying conditions that caused 2022 are still potentially here.

[00:03:58]And you can then make your own decision.

[00:03:59]But first, you need to understand what a bond is. Imagine you lent your neighbor a thousand pounds. They agreed to pay a 5% interest every year for 10 years. So every year, 50 pounds lands in your bank account. And then in the 10 years, you get your thousand pound back. Simple.

[00:04:14]That's a bond. When the government does this, we call it a gilt. When a company does it, we call it a corporate bond.

[00:04:19]Same idea, a loan with a fixed interest rate normally paid back typically over a fixed period of time. Now, these have been a staple in most portfolios.

[00:04:29]And the reason that bonds are considered less risky than stocks is well, firstly, there's a hierarchy of payment situation.

[00:04:36]Dividends from a company like you get from a stock are not an obligation. That the board can cut them tomorrow if they don't have the profits or they don't think it's right to do so.

[00:04:45]Bond payments are a legal obligation. If a company defaults on its debt, well, that has real catastrophic implications for them. So bonds sit up higher in the queue than equity holders. The trade-off is that you expect normally lower returns in exchange for that kind of legal claim and a more predictable income stream.

[00:05:03]The second reason is more interesting and it's often a bit that people get wrong and it's because of diversification.

[00:05:10]The standard playbook when the economy stumbles, whether it's a recession, a financial crisis, coronavirus, is central banks cut interest rates to basically make it easier to people to borrow, which hopefully will unlock a bit of spending in the economy and get it going again.

[00:05:27]Now, when central bankers cut interest rate, the value of your bonds normally goes up.

[00:05:33]And why? Because if you think about it, you've locked in to a higher rate in theory that's suddenly more valuable than the brand new bonds that would be issued at a lower rate because central bankers have cut their interest rate and that kind of affects the risk premium across the market. So, in a downturn, potentially when your equities are getting hit, your bonds are supposed to also rise and cushion it, as well as continually providing that predictable income stream.

[00:06:01]But, here is the problem where most people's understanding stops, and it's the hidden trouble within bonds.

[00:06:08]Because not all bonds are the same.

[00:06:10]Imagine you bought a 10-year bond paying 5%. Tomorrow, the Bank of England raises rates and now issues brand new bonds that are at 7%. Your bond you've locked in is at 5%. It's now worth less compared to comparisons or the market.

[00:06:25]Why would anyone in theory buy yours at full price when they can get a shiny new one paying 7%, not 5? They wouldn't. So, the price of your bond falls in the secondary market to factor that in.

[00:06:37]That is kind of the basic mechanism. The longer your bond has left to run, the more it falls, because you potentially locked in that lower rate for longer.

[00:06:47]That sensitivity has a technical name, duration. A bond with a duration of seven will fall roughly 7% in price for every 1 percentage point that yields rise. A bond with a duration of 16 will fall 16%.

[00:07:01]Same direction, just much bigger moves.

[00:07:03]Think of a bond like a seesaw. Yields sit on one end, the price sit on the other. When yields go up, prices come down. Simple. Now, the duration is how long the seesaw is.

[00:07:15]A short bond is a child on a seesaw in the playground. Yields move up a little bit, and the price goes up and down slightly, but no real issue. A long duration bond is kind of a much longer seesaw. And the same push in yields has a much bigger swing on the overall seesaw. So, that's the bad news. Now, and this is important, let me give you the bull case for bonds, because there is one. That exact same crash that wiped out so much capital in 2022 also reset gilts to much more attractive yields, much more attractive yields than they've offered in the last 15 years. So, a 10-year gilt that might have been paying you a measly 0.5 is now paying around 5% and it matters to retirees cuz that yield is the single most reliable predictor of long-term bond returns.

[00:08:00]If you buy a 10-year gilt at 5% and hold it to maturity, your annualized return will just be that 5%.

[00:08:07]Now, Vanguard's UK capital markets model now forecasts UK gilts will generate a 5 to 6% annualized return over the next 10 years.

[00:08:16]That's not that far off the stock market estimates.

[00:08:20]And it means for retirees using perhaps gilt laddering to fund their spending, that is a meaningful improvement on the maths. And similar research has been done globally, basically echoing the same thing that bonds now do offer a lot better value on a risk-adjusted basis.

[00:08:35]So, this is not a video where I'm telling you to dump all your bonds and run. There is a legitimate bull case.

[00:08:41]The thing is, is it's not just about the income.

[00:08:44]There is a downside and that downside could be substantial. And it depends on one variable. But just before I go into that, if you found this useful, the single most helpful thing you can do is subscribe. It really helps me understand if you're enjoying the videos. There's also a link in the description to a download called 26 actions you can do in 2026, which gets you access to some helpful calculators and also previous masterclasses. So, I would love to have you on the list and you can of course unsubscribe at any time if it's not valuable to you. So, what is that key variable? Inflation. And this has such a big impact to the cornerstone of portfolio construction. The diversification theory is basically bonds zig when stocks zag. When stocks fall, bonds rise. So, holding both in say a 60/40 gives you a smoother ride.

[00:09:31]It's like when you holiday off-season, you're not sure whether to pack the shorts or a jacket, so you sacrifice a bit of space in the luggage for both, but in theory you're better prepared for different outcomes cuz you don't know what the weather's going to be like.

[00:09:43]But, the commonly held position is based on one thing. It's regime dependent.

[00:09:49]There's a foundational paper by Campbell, Sodderholm, and Visscher, three Harvard finance professors that they did the historical work and they went back two decades of data.

[00:09:59]And the relationship they found between stocks and bonds isn't this permanent law of of portfolio construction. It flips. There's a great image from another paper which says the same and I'll put this on the screen now. You can see in the 70s and early 80s when inflation was a key problem, stocks and bonds they fell together. They were in the red. They were positively correlated. Bonds were not the defensive hedge. They were just another flavor of risk in your portfolio. So, in the red is positively correlated. That means it's not really providing diversification. In the green is when it provided diversification. So, basically from 2000 to 2021, bonds did in fact zig when stocks zagged. That 60/40 model worked really well. Now, 2022 rolls around. The correlation flips again.

[00:10:43]Stocks fell, bonds fell together just like the 70s and 80s. A more recent paper from AQR Capital, this was published in the journal Portfolio Management, quantifies what it means for the actual portfolio. They say if the equity bond correlation moves from minus 0.5 to plus 0.5, the volatility, the ups and downs of traditional 60/40 rises by close to 20%. The maximum drawdown rises to about 30%. That's kind of like stock-like drawdowns. There's another paper I just want to reference from the Financial Analysts Journal in 2023 because it gives us the longest historical record we've got from 1875 to 2021. Five developed countries including the UK, nearly 150 years of data. The headline result when inflation runs above 4%, real as in inflation-adjusted returns turn negative. and in stagflation environments, slow growth, high inflation, bonds get hammered as far as providing real returns. The truth is real losses occur both in stocks and bonds. There is no safe harbor there.

[00:11:45]So, hopefully you'll have seen that the common sense thinking can sometimes be far from it. And I want to be clear, I'm not predicting stagflation. Nobody can.

[00:11:55]What I am saying though is the academic record going back 150 years tells us bonds behave differently in high inflation environments than low inflation ones. So, what inflation environment are we going into? Well, the bottom line is nobody knows. But let me insert an opinion. I did a video about 3 years ago and I referenced this data from Research Affiliates.

[00:12:15]And it looks what happens when inflation spikes and how long does it then take to come back to 3%? Being a 3% kind of a reasonable inflation rate.

[00:12:25]It is US heavy data unfortunately and it's not quite as long as the 1800s one.

[00:12:30]But what they found is that once it rises above 8% inflation, reverting back to 3% usually takes 6 to 20 years with a median of 10 years. Basically, once the genie the inflation genie's out of the bottle, it's really hard to contain it.

[00:12:48]And it kind of makes sense if you think about it. Inflation begets more inflation. If prices shoot up, you feel poorer, you need more money. It's kind of the wage spiral in action.

[00:12:57]Now, they don't have that many instances where inflation spikes over 8% and as always past performance doesn't guarantee the future. But I've got to say it is an interesting insight into higher inflationary regimes.

[00:13:11]And does it teach us something about what we should expect going forward? So, so what am I saying here? I know I've dived in and out of some academic data.

[00:13:18]Am I saying that gilts will default? No.

[00:13:21]The UK has an independent monetary policy. We have a reserve currency. The academic literature and in my own personal opinion, which is all this is, um, doesn't predict default. What it does imply, and I think we should be aware of, is that there is a risk at the moment of sharp repricing of government debt.

[00:13:38]And if you're someone holding long duration gilts, if you're not aware of the duration of your portfolio, and this does play out, which is far from guaranteed, that is asymmetric risk.

[00:13:49]That could cause real issues.

[00:13:51]And that's why the 2022 crash in UK gilts matters to you even if you didn't lose money in them.

[00:13:58]Because the structural conditions that caused it, you could argue, haven't necessarily gone away. So, will bonds ruin your retirement?

[00:14:07]It's complex. So, let's just take a deep breath. There was a lot of information there.

[00:14:13]I don't want to leave you in a state here after this video of what now. So, so here's a framework I'd encourage you to think about.

[00:14:19]Please do take advice specific to you if you're really looking at the technicals here, because every situation is different.

[00:14:25]But the question I think it's wise to ask is, are you acting in accordance to a financial plan with your portfolio?

[00:14:31]Does it make sense for your goals? A portfolio is meaningless on its own.

[00:14:35]It's got to be aligned to the things you want to achieve. If that means bond allocations, that means bond allocations. If that means stocks, it means stocks. The point is, is it intentional? As I tried to make the case in this video, there is perhaps a case that bonds offer much better risk-adjusted returns. If we see a drop in interest rates, those bonds provide enormous value. What it does come down to is, do you actually know what you're invested in?

[00:14:58]And sometimes this might be a bit more complex. Do you know how your portfolio is set up? Is there a high level of duration in your bonds? Do you actually know what's under the hood? As I've explained in this video, this can make a really big difference to the outcomes.

[00:15:11]And something we're very keen to do, um, at the company I'm a director of Flying Colors Advice, is has it been stress tested?

[00:15:18]Whether that's in your own cash flow plans, with the help of a professional.

[00:15:22]If we see normal than higher inflation over the next 10 years or so, how does your plan hold up?

[00:15:28]Cuz I want to come back to that moment I mentioned from the Bogleheads forum.

[00:15:31]Turning 72, pension dropped substantially.

[00:15:34]She didn't do anything wrong. She trusted the system, and that's the kind of the part that gets me.

[00:15:39]Because having sat across the table from hundreds of people who did everything they were told to do, they paid in for years, they never panicked, never tried to be clever.

[00:15:47]It's such a shame to see an outcome that didn't match necessarily the efforts of their saving.

[00:15:52]It was because the framework that their default fund was acting for was potentially for a different world. So, my message to you is that what has happened ultimately over the last few decades is the responsibility for the retirement has gone from employer or government to individual. And it can that can be the key difference between a retirement that works that doesn't. It's how well you personally plan for the scenarios. So, if you're watching this, I'd really encourage you to get intentional on your planning as much as you can.

[00:16:21]Thanks so much for watching.