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MARKET COMMENT
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Following last week's Pre-Budget report, there has been lots of talk that the good run bonds have enjoyed in recent years could be at an end. It's all down to supply and demand. People reckon that the Chancellor will need to issue more gilts in order to fund his commitments on public spending. An increased supply of gilts with no matching increase in demand means the price of gilts will decline. This could affect you in many ways. Bond funds have been one of the top-selling investments in the last year or so as investors sought some stability away from the stock market. Will this be another example of people buying at the top? Many pension schemes have been following a similar strategy in order to meet their liabilities regarding final salary pension schemes. Many funds, like those operated by Boots (LSE: BOOT) and Equitable Life, have a very heavy weighting in bonds. On the flip side, a fall in the price of gilts and hence a rise in their yields (see our guide to gilts for more info) means we could see a rise in annuity rates, making your pension pot stretch a little further. Having said all that, the financial markets don't seem overly bothered by the prospect of this increased borrowing. Not yet anyway. The price of ten-year gilts fell by about 1% following Gordon Brown's speech but has moved little since Thursday morning. Once again it raises the question of how you should allocate your assets if you want the much sought after 'well-balanced portfolio'. Having a high proportion of bonds in your portfolio is advocated by many. Some even suggest the percentage of bonds in your portfolio should match your current age. Personally I'm not a great fan of bonds. They can be expensive for individuals to invest in and, despite their recent good run, their long-term returns are similar to those of cash. Unlike cash though, the performance of bonds in any one year can fluctuate wildly. They're very much a bet on the direction on interest rates, which is too tough a call for the majority of us to make.