Bond markets are on edge. Which funds could weather the storm?

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Shares Magazine

12 November 2026

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Many bond fund investors will have noticed modest declines in value since September. This is linked to a broader sell-off in government bonds in various parts of the world including the UK, France and the US.

What bond investors need to know

• Rising yields mean falling bond prices.
• Bond fund losses don’t necessarily mean the long-term outlook has worsened.
• Higher yields improve future return potential.
• Short-duration, floating-rate and strategic bond funds may hold up better if yields rise further.
• The biggest risk remains inflation and interest rates staying higher for longer.

Funds holding bonds that mature many years in the future are typically more sensitive to rising yields than funds owning shorter-dated bonds.

For most long-term investors, a modest decline in a bond fund isn’t necessarily a reason to worry. The same forces pushing down bond prices today are also increasing the income and future return potential available from newly issued bonds.

To help explain what’s going on, we spoke to various bond experts to understand what is happening, and which type of bond funds might hold up better than others in the current environment.

What’s driven the bond market sell-off?

Inflation and government over-indebtedness are among the drivers of lower prices and higher yields on government bonds. A spike in energy prices has pushed up costs for consumers and businesses. Inflation matters because it directly influences central bank interest rate decisions alongside the strength of the jobs market.

The market has pushed back expectations for interest rate cuts and, in some cases such as the UK and US, is pricing in the possibility that rates remain elevated for a more extended period.

“We have fears that inflation will be higher for longer,” says Eoin Walsh, portfolio manager for the TwentyFour Select Monthly Income Fund. “Governments are running with a lot more debt, and that is now becoming more expensive.”

The rising cost of servicing debt means there is less money left over from tax receipts to fund government spending. Investors are increasingly focused on the sustainability of public finances and whether governments can control borrowing without weighing on economic growth.

It explains why investors are demanding a larger risk premium. They are no longer willing to lend to governments at yesterday’s yields because they see greater inflation, fiscal and economic risks ahead.

Are corporate bonds selling off as well?

Corporate bonds have been less affected by the recent sell-off, but they are not immune. Credit spreads, which measure the additional yield investors demand to own corporate bonds rather than government bonds, have recently started to widen.

Widening spreads can indicate concern about economic growth, corporate finances or market volatility. In simple terms, investors are asking for more compensation to lend to certain companies rather than governments.

The corporate bond market is divided into investment grade (good quality) and non-investment grade issuers. The latter are sometimes referred to as high yield, or junk bonds, and these firms have weaker finances, more debt and often operate in more cyclical industries, all factors which makes them vulnerable during periods of rising interest rates and economic recession.

What are bond fund managers doing right now?

Bond fund managers are looking at opportunities to recycle money from maturing bonds into ones that offer better yields caused by the market sell-off. That process can take time because managers typically reinvest proceeds as existing bonds mature rather than holding large cash balances.

Managers could be looking at extending duration gradually if yields become attractive, upgrading or reducing credit risk, locking in higher yields, and exploiting market dislocation.

Duration is a measure of how sensitive a bond fund is to movements in interest rates and bond yields. Funds with a longer duration tend to experience bigger price swings when yields rise or fall, while shorter-duration funds are generally more stable.

Some managers might choose to sell certain bonds now, potentially at a loss, if they believe the investment case has deteriorated in a higher cost of borrowing environment.

Which types of bond funds could do better or worse now?

Bond funds can vary depending on what’s inside their portfolio. Some will invest purely in government bonds; others might invest in corporate bonds – while some will do a mix and match approach. Managers will also hold bonds with varying timespans.

If yields keep rising sharply, the most vulnerable funds might be those with long-dated bonds, such as those with more than five years’ duration. Longer-dated government bonds can be significantly more sensitive to yield changes than short-dated bonds.

Fortunately, there are other types of bond funds and credit funds that could prove more resilient against the current market backdrop. There is no guarantee of success, but certain types have characteristics that have historically been an advantage in similar environments.

Floating-rate bond or loan funds

Funds that hold floating-rate loans such as investment trust CVC Income & Growth are designed to cope better with rising yields because their interest payments move with market rates. Unlike traditional bond funds, they have very little duration risk, which means they are typically less vulnerable to the price falls that occur when interest rates rise.

Pieter Staelens, lead fund manager at CVC Income & Growth, says: “We invest mostly in floating-rate bonds and loans. This means that higher base rates result in higher coupon income as coupons get reset every quarter. Floating-rate instruments also typically exhibit lower sensitivity to interest rate movements than fixed-rate bonds, given interest rates aren’t fixed for a longer period.

“We prefer lending to the old economy. We like companies with predictable cash flows, such as healthcare and food providers,” adds Staelens.

Strategic bond funds with low duration

Strategic bond funds with low duration can be more defensive when yields are rising because managers have the freedom to reposition portfolios as conditions change.

You’re outsourcing the asset allocation decision to the fund manager which means the expert is doing the hard work. By keeping interest rate sensitivity low and shifting between different parts of the bond market, the fund manager can potentially limit the impact of higher yields on investors’ capital.

Artemis Short-Duration Strategic Bond is one example of a fund in this category. Co-managed by bond expert Stephen Snowden, it targets an annual return of at least 2.5% above the Bank of England base rate after fees. It invests globally in government and corporate bonds as well as asset-backed and mortgage-backed securities.

High-yield corporate bond funds

High-yield corporate bond funds have naturally low duration and naturally high yield. However, they carry greater credit risk. If economic conditions deteriorate and company defaults rise, high-yield bonds can fall sharply even if government bond yields stabilise.

Invesco High Yield UK is on AJ Bell’s Favourite Fund list and invests in high yield corporate bonds and subordinated debt instruments (debt that ranks below more senior debt). The weighted average effective maturity as of 31 August 2026 was 2.14 years. In plain English, that provides an estimate of how long, on average, the bonds in the fund are expected to remain outstanding before being repaid.