Bonds are different from shares, as they represent a loan made to an organisation. They typically pay a fixed rate of interest on the loan over a set period, meaning the investor gets a fixed level of income over the term of the loan – hence the name of the asset class: fixed income. At the end of the term, the initial amount borrowed is repaid to the investor. 

Bonds can be less risky than shares as organisations prioritise paying back debt over paying out profits to shareholders. Even if a company is not making any profit, as long as the company can service its debts, bondholders will get their money back. Bonds can also be sold to other investors at any time and their value will vary due to factors such as the financial strength of the issuer and interest rate developments. So, it’s important to remember that, as with all investments, the value of bonds and the returns they provide fluctuate over time, so investors could get back less than they put in. 

Favourable interest rate developments 

Interest rates have been very volatile over the past few years. We have seen them move from extremely low levels during and after COVID, to high levels with a peak around mid-2024. Rising inflation from 2022 onward made rate hikes by central banks necessary. Now that inflation is falling and moving towards its 2% target, central banks have started to gradually lower their policy rates again. The Bank of England has also reduced its Bank Rate twice by 0.25 percentage points in the second half of 2024 to its current 4.75%.  

Despite these cuts, current interest rate levels are still elevated, meaning that bonds offer attractive yields to investors. Triodos Sterling Bond Impact Fund started the year with a yield of 4.9%. This not only compares well to cash returns like the interest on savings accounts, but it also provides bond investors with a buffer against adverse interest rate developments going forward. An additional advantage of these higher interest rates is that bond investments may increasingly start taking on their traditional role in a balanced investment portfolio again: to provide protection in periods of unfavourable equity performance.

And finally, if inflation keeps falling and economic activity slows further in the coming months, bond investors may expect an extra return from declining long-term yields and increasing bond valuations. A key characteristic of bonds is that bond prices and interest rates (yields) move in opposite direction. If interest rates rise, the fixed rate of interest offered by outstanding bonds becomes more attractive.  

Positive impact 

The above-mentioned arguments focus on the financial reasons to invest in bonds. Albeit very important, this is not the only characteristic of investments that matters to Triodos Bank. We focus our investments first and foremost on societal return. All our investment products aim to generate a positive impact on society and the environment. Triodos Sterling Bond Impact Fund does this by investing in corporate bonds issued by impactful companies and by investing in so-called ‘use-of-proceeds bonds’, like green and social bonds. Use-of-proceeds bonds are a type of impact bonds the proceeds of which are earmarked to finance eligible environmental and/or social projects. Use-of-proceeds bonds are a strong instrument to steer the investments towards more positive impact.

The issuer of the bond, moreover, is obliged to report on the impact results. Impact bonds have therefore become an important asset in our bond portfolios, currently accounting for close to a quarter of the portfolio. The market for impact bonds has become more mature over the past years, with an increasing number of corporate issuers entering the market. But as the market for impact bonds still consists to a large extent of green and social bonds issued by large government-related issuers, Triodos Sterling Bond Impact Fund has, by nature of its impact strategy, a large allocation to higher-quality impact bonds. The advantage of this is yet another financial argument, as it means the portfolio has a lower exposure to price movement. 

In conclusion 

The current market environment has made Triodos Sterling Bond Impact Fund an attractive investment product from an impact-risk-return perspective. Apart from the attractive yield, bonds also offer resilience for adverse market developments in risk assets, such as equities. Moreover, by focusing on impact bonds, the fund adds additional value by generating positive impact and contributing to lowering overall credit risk through the higher average quality of the issuers.

The new Triodos investment calculator allows you to see how much your investment could be worth in the future. This tool also illustrates the expected ‘impact’ of your investment, in terms of landfill waste and CO2e.