What’s Hot
· Action in semi-conductors drove the tech sector higher, underpinned by AI spend by big tech
· Emerging markets benefitted from a mix of weak dollar, attractive valuations vs US, and tech exposure (e.g. Taiwan)
· The story is similar for Asia ex Japan.
· North American smaller is benefitting from Trump’s drive to “re-shoring” and protectionism, plus relative valuation attractions vs US large caps…
· …but their exposure to higher inflation and floating rate debt is a significant caveat
What’s Not
· Global healthcare, dominated by the US, continues to suffer from Trump’s tweet attacks, and threats to margins
· Three conventional bond sectors feature, not surprisingly…
· Remember, if inflation is heading up, interest rates or yields on bonds go up, and their prices go down
· So why did index-linked do worse than conventional bonds? Surely they should do better if inflation is picking up?...
· See the explanation from Claude below these two tables
What's Hot
Name | Last Month's Performance % |
|---|
Technology & Technology Innovation | 14.60 |
Global Emerging Markets | 9.52 |
Asia Pacific Excluding Japan | 9.22 |
North American Smaller Companies | 7.78 |
North America | 6.49 |
What's Not
Name | Last Month's Performance % |
|---|
Healthcare | -2.63 |
UK Index Linked Gilts | -2.10 |
USD Government Bond | -0.94 |
UK Gilts | -0.92 |
USD Corporate Bond | -0.87 |
Why linkers value went down as inflation heads up? This from Claude…
This is a really important and slightly counterintuitive question — because people assume linkers should do well when inflation rises. The answer lies in one critical concept: duration. Let me explain it properly.
What happened in April
UK bonds had another tough month in April, with benchmark 10-year yields rising nearly 15 basis points to above 5%. UK 10-year gilt yields climbed toward 5.1%, approaching levels last seen in 2008, as soaring oil prices — driven by the US blockade of Iran in the Strait of Hormuz — heightened inflation concerns and led investors to anticipate further central bank tightening.
Real yields on 10-year index-linked gilts hit 1.51% on 16 April 2026 — the highest since 2008.
Lloyds revised its UK economic outlook, raising its 2026 inflation forecast to 3.4% from 2.6% and slashing GDP growth expectations to 0.5% from 1.2%, with markets pricing in almost three quarter-point rate hikes for 2026.
Why linkers fell harder — the duration problem
This is the crux of it. Most people assume "inflation is rising, so linkers should win." But that misses something crucial about how these bonds are structured.
Because of high demand from big financial institutions, UK inflation-linked bonds typically take a long time to mature, often more than 20 years. They therefore have very high "duration" — the sensitivity of a bond to any change in interest rates. The higher the duration, the more sensitive the bond is to a movement in rates. This can lead to bigger price drops when interest rates rise. The result is that index-linked gilts do not necessarily offer protection against inflation over shorter periods as the prices of the bonds could fall dramatically.
Why do linkers have such long duration? Because inflation-linked bonds typically have lower coupons than conventional bonds, their cash flows concentrate more heavily at maturity. This extends their duration beyond what investors might expect. During periods when real yields rise sharply, index-linked gilt prices can fall substantially even if inflation remains elevated.
In plain English: a conventional gilt paying a 4% coupon gets a lot of its value back quickly through regular payments. A linker paying 0.125% or 1.25% gets almost all its value at redemption, decades away. The further the cash flow, the more it gets hammered when rates rise. A bond with 25-year duration falls roughly 25% for every 1% rise in real yields.
The painful paradox
So in April, you had a situation where oil-driven inflation fears simultaneously:
Made investors worried about persistent inflation (bad for conventional gilts)
But also pushed up real yields as markets priced in BoE rate hikes to fight that inflation (catastrophic for long-duration linkers)
The Iran conflict and energy shock — with oil remaining elevated above $110 per barrel — fed directly into UK inflation expectations, while markets priced in fewer rate cuts, creating a double blow for the gilt market.
Conventional gilts suffered too, but their shorter effective duration and higher regular coupons meant they fell less. Linkers, with their extremely long duration and tiny coupons, bore the brunt. It's the classic trap: inflation protection that only works if you hold to maturity, but devastates you in price terms during the journey if real yields are rising.