I’m cautious by nature, personally and professionally. That’s nothing new for me. I’ve overanalysed situations since I was at high school – probably earlier but my memory isn’t good enough to go back any further. I guess if I had a mantra it was: ‘Don’t act until you are sure. Don’t make a mistake.’

Sometimes it doesn’t pay to be cautious – the stars never align, and waiting for them to do so means you miss your chance. Professionally, many a time I have set a target to buy or sell only for markets to turn just as they approached my level.

Personally, since my school days, I have often found an excuse for not participating, not going to the party, not asking the girl to dance, not moving house. With the benefit of nearly 40 years of hindsight, those are the things I regret.

Sometimes taking time does pay dividends, though – slow and steady wins the race; more tortoise, less hare? It’s probably why I ended up a bond manager and not in the supposedly sexier, more high-octane world of equities. Professionally, waiting for our target levels – levels based on judgement and process – did often work.

We didn’t get sucked in too early, we could justify actions to clients. A year ago, UK gilts paid investors next to nothing. We’d been under pressure to invest, to lengthen duration, purportedly to capture the last vestiges of the multi-decade bull rally. We didn’t bow to that pressure. Likewise, as yields rose, first to 1% then to 2% temptation to buy grew stronger. However, our long-term goal was 4%. I left the market before that number was reached. All I can say is that having not owned bonds directly for many years, once I saw 4% I bought in for my personal pension fund.

And taking a cautious approach may have worked in my personal life too. My wife and I met at work, and we knew each other for years until we got together. We’ve been married for nearly 30 years. So far, so good!

Do nothing

For the past few years, there was one decision, quickly or slowly, I was happy I did not have to make: what type of fixed-term investment product to buy?

Should it be gilts, corporate debt or putting money into a bank savings account? As bond yields hovered under 1% and bank deposits paid zip, there was no point. No need to decide. Lovely. Suits my personality to a T.

Circumstances have changed. In recent weeks much has been of the UK pension fund fiasco. We have seen the Bank of England buy bonds to prevent a ‘run’ on the gilt market. That such a strained situation came about was of no great surprise to many experienced bond managers. Yields had been manipulated for a decade, and the extent to which pension funds appeared fully funded was also boosted, thanks to quantitative easing.

Pension funds simply borrowed returns from the future, trading today’s capital gain and inflated asset values against long-term income. Of course, no scheme sponsor would complain – those inflated asset values reduced the need to dip into corporate revenues to fund deficits, meaning more cash available to distribute to shareholders. We can blame liability-driven investment – it is always easier to put a fancy name on something rather than admit folk just got careless, greedy and perhaps a bit stupid. Mind you, not even I thought the gilt market was capable of bringing down a prime minister.

Several years ago. as gilt yields moved down, I decided to contract out of two pension funds (one defined benefit, the other defined contribution). I now manage my own pension pot (very long cash for the past couple of years). I know the yield and the income I need to pay my bills. A 1% return on bonds? No, thanks. No point. Lots of downside, little positive return with the very real prospect of significant losses on my DC scheme. Now, thanks to an unhealthy dose of inflation we are starting to get to levels of income on UK bonds that interest me.

‘Current bond yields are not far from the average of the past 50 years’

What, then, do we want from bonds? Are we investing for long-term income or short-term capital gain?

I’d thought of writing about the role bonds are supposed to play in a modern portfolio – purported diversification, balancing higher risk assets in the classic 60/40 strategy.

I guess by now, a decade into quantitative easing (QE), we know that classic strategy is flawed. Central banks have proved they have the power to correlate the direction of almost all assets via balance sheet expansion. I am no fan, but have to understand their continuing power.

What do we want from bonds, if not diversification? We all know there is a trade-off when we invest in bonds. If for any reason the price moves higher today, that reduces the yield we receive tomorrow. It is close to a zero-sum game, especially for those investing direct. Capital gain now, or steady predictable income later?

One problem with QE is that it distorted the usual pattern of asset returns. False demand meant bond prices moved to incredibly expensive levels. Great for those who owned them before this year, of course. We made huge capital gains at the supposed cost of future yield – think pension funds, think complacency, think greed, again.

Now, thanks in part to that excess monetary stimulus, yields and prices have suddenly moved back closer to long-term norms. Current levels suggest that future returns may follow patterns we are more familiar with. A focus on longer-term, reasonably predictable yield, on income rather than the possibility of aggressive short-term capital gain in bond funds?

I’d suggest for many clients, a degree of predictability would be very welcome. Core government bonds paying between 3% and 4% each year, and corporate bonds a little more than that, make sense, especially if the UK economy returns to more usual levels of growth and inflation. And less capital volatility than we have seen of late!

However, I read an article from a well-known commentator the other day suggesting not all in the market think that way. The author wrote how bonds were starting to look attractive to her for the first time in a decade. I had a lot of sympathy. Yields on UK government bonds had risen well above 4%. And at that level, the income would be attractive in my pension pot – suiting my circumstances, perhaps not yours. It is usually best to take advice.

She argued that we would soon see a spike higher in bond prices. Rather than focus on the income, there was a great chance to make a quick capital gain:

• Higher base rates from the Bank of England have already pushed bond prices down;
• base rate hikes are also creating higher market borrowing costs;
• those will quickly choke off growth and investment;
• that in turn will lead to a rise in unemployment and a slowdown in wage inflation;
• UK CPI inflation would move back toward the Bank of England monetary policy committee’s 2% target in the next two to three years;
• the Bank will then cut interest rates;
• bond prices will leap as yields fall back in response.

That’s basically the MPC’s view too.

What do clients want?

Let’s be honest. Bond prices and bond markets became way too expensive by 2021. On almost any economic or logical basis they should have been rated a sell.

Many (including some involved in the pension fund market) believed that was the ‘new normal’. For various reasons, they have been proved wrong. I believe those arguing for quick, material short-term capital gain from bonds need to be careful what they wish for if yields move back to QE levels. That would signal ongoing crisis and economic malaise.

When I think about what I want the bond market to deliver me, it is back to tortoise versus hare. Plod along, nice and steady. That has advantages.

Current bond yields (at the time of writing the UK 10-year is around 3.75%) are not far from the average of the past 50 years. OK, they are much higher than the average of the past decade; remember, though, that was a period of recovery from the financial crisis when the prevailing wisdom was to ‘make money free’. That didn’t work.

Market events of recent months have shown us again that what is needed is stability and certainty: predictability. It’s good for consumption, good for investment, good for economic and political planning, and, of course, good for most financial assets.

We know the bond trade-off between capital gain and income – a 10-year bond with a 4% yield gives us a 40% total return over its life. I’d much rather see 4% per annum, rather than a quick 10% or 20% capital gain now and much lower levels of income over the following nine-odd years. A decade of stability? How nice. Might even be good for your equity portfolio!

More tortoise, less hare. More certainty, less volatility. More planning, less panic. I’d suggest that’s what most investors want. For the good of the economy and broad asset class returns, it is certainly what we need bonds to deliver now.

David Roberts is a retired fund manager and Citywire Amplify columnist. He spent more than 30 years as a fixed income manager at Britannia Investment Managers, Lloyds Bank, Kames Capital and Liontrust.