Bonds almost certain to lose money, warns bond house

Long-term bonds are almost certain to lose money over the course of their lives.

11:50 23 February 2005

Long-term bonds are almost certain to lose money over the course of their lives, according to a new report published yesterday.

Future inflation is highly likely to erode the rates of return on government bonds bought today, the Barclays Capital Equity Gilt study suggests.

"Bond yields are dangerously low," the report's author, Tim Bond, warned, arguing that only bodies such as defined-benefit pension schemes - which have inflation caps - should consider buying them.

"A positive long-term real return from buying long bonds near 4 per cent is very, very unlikely", he warned, suggesting that he would be "incredibly surprised" if inflation did not rise above the Bank of England's target current level in the next 20 years.

In addition, the retirement of the "baby boomer" generation over this period is also likely to alter the balance between the working and dependent populations, and to bring large numbers of new sellers of financial assets into the market, dragging returns down.

Barclays Capital is one of the country's largest bond issuing houses.

As the report was published yesterday, the firm was lead-managing a 50-year bond issue on behalf of the French government.