Why Bonds for De-Risking? An Honest UK Answer
Bonds dropped 20% in 2022 and a money market fund quietly did the same job for two years afterwards. So why is the textbook still 60/40? The honest UK answer near retirement.
Bonds vs money market funds: the three jobs
| Job | Bonds | Money market funds |
|---|---|---|
| Yield above cash | Yes (term premium) | Roughly equal at SONIA |
| Gain when rates fall | Yes (capital appreciation) | No (yield collapses instead) |
| Lock in known return | Yes (to maturity) | No (floats with overnight rate) |
| Negative correlation with equities | In deflationary recessions | Negligible |
2022 bonds fell ~20% in a rate shock. The three jobs still work in deflationary recessions.
Key takeaways
Bonds do three jobs in a portfolio: pay a yield above cash, gain value when interest rates fall (typically during recessions, when equities suffer), and lock in a known return over a known duration.
Money market funds and cash savings accounts deliver job 1 well but cannot do jobs 2 or 3. They float with overnight rates, so when rates get cut to zero you earn nothing.
The 2022 bond crash was a duration shock - rates rose fast and long-dated bonds re-priced down. That is a known feature of bonds, not a sign they are broken.
The textbook answer (60/40 with bonds) is defensible but not gospel. Short-duration bonds or a gilt ladder do most of the same work with less volatility, and are a fair UK substitute.