I Have written several times in recent years urging Monevator Readers should not feel guilty. (That is, UK government bonds.)
It wasn’t because I’m a hardcore guilt groupie. In contrast, my allocation to bonds has been closer to flatline than conservative investments for most of my investing life.
However, even as a rooting, tootin’, stock-loving active investor I could see that many passive investors were throwing the bond baby out with the bond bear market bathwater.
After Covid, after Liz Truss who can blame them bond route?
As interest rates rose and inflation got back on track, overpriced bonds crashed. The result was one of the worst conditions ever for UK investors in government bonds.
Here’s how the iShares Core UK 10-Year Government Bond Fund 2022’s Liz Truss bottomed out:
Source: Fiscal AI
You don’t need to be Warren Buffett to guess what impact seeing ‘safe’ assets decline like this had on investor interest.
“Be greedy when other people are writhing on the floor, breathless, calling for mommy.”Any?
No, thank you, to the surprise of many would-be bond buyers.
Once More Unto the Breach
However, if investors made the mistake of trusting the market’s wisdom before the bond crash, it resulted in buying bonds at negative yields. Can only give negative returns in the long run.
Yet after the bond’s decline in 2022, the yield-to-maturity was positive across the entire curve.
At least in nominal terms, gilts were now priced to actually reward investors for holding them.
So it seemed to me that some investors were closing the door on gilts after the horse flipped, fell into the ditch, and got beaten out, sure, but ready to run again.
Note: I was not suggesting that UK government bonds would be definite winners. Nor will they give Bitcoin or the Magnificent Seven mega caps a run for their money.
It was just that with yields restored closer to normal, I felt they could be added to the portfolio once again without the existential negative yield drama.
gilt trips
So how have gilts performed since those dark days of 2022, when the UK contemplated a salad Will you do a better job of steering the ship of the state?
ok if you mumble “Jog on the Investor” By reading my articles and staying away from guilt, you will be very happy. This is even if you have your money invested in cash or money-market funds – let alone buying more equities instead.
Because Gilt hasn’t been doing much since then. Indeed with hostilities in Iran continuing, the 10-year gilt yield broke above 5% on fears of resulting inflation, before it fell back on news of a temporary ceasefire:
Source: cnbc
Remember, yields move inversely with bond prices. All else being equal, higher yields on gilts reflect lower gilt prices prevailing in the market.
core blighty
On the one hand, it is worth noting that the UK is still considered a basket case by international investors.
As cnbc informed By the end of March:
From a British perspective, one of the most alarming aspects of the sale of risk assets following the attack on Iran is how gilts – UK government IOUs – fell more rapidly than bonds issued by any other G7 economy.
Take the 10-year gilt, the most liquid and most widely traded of all gilt maturities and the best proxy for the UK government’s long-term borrowing costs.
At one point (…) the yield reached 5.115% – a level not seen since the global financial crisis in April 2008.
These moves were much faster than those of other G7 countries. In fact only Australia’s 10-year yield is higher among similar economies.
cnbc The author highlighted the reasons for this:
One is that the Bank of England’s policy rate was already the highest of any G7 central bank and Britain’s inflation rate is higher than its peers.
Secondly, interest rate expectations for the UK have changed more dramatically than for any other G7 economy. Before the clash, the Bank was expected to cut its key policy rate this month – leading to a sharp reaction in gilts.
The third is that, except Japan, no G7 economy is overly dependent on imported gas – the price of which has soared.
Fourth, investors dislike British politics. The surge in energy prices has raised fears of more spending to support households – funded by growth-destroying tax increases or more borrowing – to support households. They also fear that if the ruling Labor Party performs poorly in May’s local elections, it would result in a leadership challenge to Prime Minister Keir Starmer and the possible appointment of a more left-wing opponent in his place.
But demanding a premium to hold gilts is nothing new. This was most strongly reinforced in recent times for the British public when gilts were sold off heavily in September 2022, after Liz Truss’s government unveiled a mini-budget including £45 billion worth of non-funded tax cuts.
Market participants reported investors demanding a ‘fool’s premium’ for holding gilts over similar tenor bonds issued by peers.
As I have pointed out many times in our debates about Brexit, Britain is a relatively small nation that depends on trade for its economic health and the ‘kindness of strangers’ to shore up its finances. It has suffered from hyperinflation compared to the continent for generations. By leaving the trading block we have increased those vulnerabilities.
Add an energy shock to Downing Street and an adverse climate change and there is still little for global bond investors to get excited about.
Big expectations from gilts
So far, it’s very wet in terms of gilts.
However, there is still a ray of hope for higher bond yields. That means higher expected returns.
As we reported in 2022:
Rising bond yields are a positive for long-term investors who can recover capital losses and ultimately enjoy hefty income payouts.
Much of the despair and hopelessness after the financial crisis was related to the fact that lower yields meant poorer long-term bond returns. It also pulled down the equity risk premium.
Now, rising rates and a return to the old normal are leaving that particular threat in the rear view mirror.
A higher coupon should reduce the volatility of the bond. They also strengthen your safeguard against equity losses.
There is certainly a risk that yields will continue to rise, as noted in our article.
Inflation will always be a threat for traditional bonds as well.
But the key point was that investors suffering nominal losses of 30% or more in their gilt allocations were unlikely to suffer losses again from the early 2022 point onwards. An unusually extreme situation had arisen.
And certainly, we have not seen a repeat of that massacre. While gilt returns since then have been the definition of ‘meh’, they haven’t blown away any portfolios.
Rather, here’s how ownership and coupon reinvestment of iShares’s 10-Year Gilt Fund (ticker: IGLT) has fared since the end of 2022:
Source: Fiscal AI
Well, no one is posting rocket ship emojis behind the 3.4% total return. but this Is Positive.
What about long-term index-linked bonds? How have they performed since I considered a potential opportunity in index-linked gilts in the summer of 2023?
Well here are the total returns of IGLT’s index-linked sister fund from iShares (ticker: INXG):
Source: Fiscal AI
That return is negative, which is disappointing – but it’s not too negative.
Furthermore the opportunity my article was highlighting (initially) was ultimately an emerging opportunity to buy a positive-returning index-linked ladder.
Still, I can’t deny I thought INXG might bounce back a little faster than this.
small economy
On the other hand – and especially in his articles from 2022 – accumulator has repeatedly suggested that jittery investors should reduce the duration of their bond allocation.
That is, they should invest in shorter-term bonds (or bond funds) that are less sensitive to interest rate risk.
So here’s how Amundi’s 0-5 Year Gilt Fund (ticker: GIL5) has been performing since 2022 annus horribilis: :
Source: Fiscal AI
This is exactly what most people want from their bonds!
If we could guarantee modest ‘up and right’ returns from Gilts we would all be willing to own them. (Spoiler alert: We can’t guarantee it.)
long prospect
At the other end of the spectrum, ultra long-term gilts like the standard Treasury 2061 (ticker: TG61) that we saw surged last summer, but they have recently decelerated due to war and inflation fears.
For the record, you can lock-in a yield-to-redemption of 5.3% on TG61 as I type.
My friend I quoted in that 2025 article has an allocation of ultra-long gilts for tail-risk depression insurance. And where else can you get insurance that pays you a good income while you wait?
It’s sure to have its moment in the sunlight some day… isn’t it?
Gilt: complex
What you think through the recent returns from gilts probably depends on what you thought about 2022. There is something for everyone.
However, I hope that if you honestly expected the intense bond pain to continue, you would at least talk about the one-time reset from negative yields now, and also how good higher yields are for future returns.
More generally, let’s film a graphic accumulator. Here’s a quick reminder of why most investors will want to buy some government bonds:
You will notice that ‘Stonking Gainz’ is absent TA Summary.
Most investors over the age of 30 are advised to own some bonds (or less risky items like cash), as relying solely on the potentially best performing asset – equities – can be too risky and volatile.
And now that gilt yields have returned to normal, their role is a Possibility Portfolio stabilizers have also been reinstated.
In fact, take your eyes off the stock market rally and gilts sure look quite attractive. choice of vanguard Expect 10 Year Gilt Returns About 5-6% per year In the next decade.
This is not a bold prediction. The initial yield of gilts (to redemption) is a great guide to your expected return. Remember, 10-year gilts are already yielding close to 5%.
goldilocks gilts
Of course we have all learned some lessons from 2022.
I will still oppose it Monevator For a passive-focused site almost zero years before the crash, Gilt was relatively cautious about returns, as a search of our archives will attest. (This prophet warns accumulator There is an example about negative-yield index-linked gilts from 2016).
Although it’s fair to say that we also took our lumps.
Our view now is that prudent diversification should also consider holdings of cash, gold and potentially commodities. Also thinking even more carefully about bond duration, and perhaps using a gilt ladder if pure inflation hedging and/or the sequence of real cash flow returns is very important to you (such as if you are in retirement and receiving income).
It is also true that if governments eventually try to finance their growing national debts, the returns from traditional gilts could be very poor in real terms.
On the other hand, maybe they won’t or can’t do it. And there are always index-linked gilts to own.
Remember that all investment options involve trade-offs. Nothing is 100% ‘safe’ and risk cannot be created or destroyed – only changed for other types of risk.
In particular, if you believe that there is no harm in holding cash or MMFs instead of intermediate-term gilts. accumulator This has been shown to historically cost you through lower returns.
Finally, it’s been a long time since we’ve had a prolonged bear market for stocks. The notion that you have to make a case for an allocation to fixed income will seem very strange at a time like this, if history is any guide.
