Are Gilts a Safe Haven Once Again?

Investors have grown used to the low income available on gilts, but as yields rise and prices fall, might they reach a point when this safe haven looks like a safe haven once again?

Cherry Reynard 27 March, 2017 | 10:07AM
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From the election of Donald Trump to accelerating global growth, a combination of factors have conspired to derail the multi-decade bull market in bonds: Amid growing volatility, UK gilts prices have fallen steadily over the past six months. Investors have grown used to the low income available on gilts, but as yields rise and prices fall, might they reach a point when this safe haven looks like a safe haven once again?  

On an absolute basis, it is difficult to argue that government bonds look good value at the moment, even after recent moves. The UK 10-year gilt currently has a yield of 1.18%. While this is substantially above its level of 0.52% in September last year, it is still below its level of 1.45% in March of last year.

Inflation Eats into Returns

Inflation is currently running at 2.3%, so investors are still losing capital in real terms by investing in gilts. The risk-reward also looks relatively poor. Barring a catastrophic scenario, it is difficult to see gilt yields moving much below their levels in 2016, but if inflation takes holds and interest rates move higher, they could sell off significantly.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Cherry Reynard

Cherry Reynard  is a financial journalist writing for Morningstar.co.uk.