There has been a surge in the pace of wage growth but a rise in the jobless rate following a big drop in the number of payrolled employees, according to the latest official figures.
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Understanding Bonds and Gilts
Bonds and gilts represent low-risk fixed income investments that play a significant role in any investment portfolio. Corporate bonds are issued by companies, whereas gilts are specifically issued by the British government to raise funds.
The safest corporate bonds, termed investment-grade, are rated BBB or above by agencies such as Standard & Poor's. Conversely, riskier bonds are often referred to as junk bonds or high-yield bonds, offering higher returns to compensate for increased risk. Government bonds, such as UK gilts, are considered risk-free investments, often safer than AA-rated corporate bonds. However, bonds issued by emerging market governments can carry substantial risk.
Bonds generate both income and capital value. They provide interest payments, known as coupons, which represent the yield at issuance. However, bond yields fluctuate with interest rates. Falling interest rates lead to higher bond prices and lower yields, while rising rates result in lower bond prices and higher yields. Therefore, the running yield is a crucial metric to consider.
The initial price of a bond, called par, reflects its face value at maturity. However, bond prices can deviate from par during their lifespan, potentially resulting in losses or gains at redemption. This is captured by the redemption yield.
The magnitude of losses or gains depends on the bond's duration, which refers to its time to maturity. Each percentage point change in interest rates is amplified by the duration. For instance, a 1% increase in rates could lead to a 5% decline in the value of a bond with five years remaining to maturity.
Bonds offer diversification benefits in investment portfolios as they tend to exhibit different performance patterns from stocks, resulting in a low correlation. For example, during stock market downturns, central banks often lower interest rates to spur economic growth, boosting bond prices and offsetting losses in equity holdings.
Furthermore, bonds offer an income advantage over shares when held in individual savings accounts (ISA's) as bond interest is tax-free, whereas share dividends are subject to tax deductions.
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