With market volatility continuing, Niall Aitken, Investment Actuary, reflects on the future for Gilts and the role they play in our Governed Range portfolios.
With a December General Election confirmed for the first time in nearly a century and Brexit delayed until next year, 2019 shows no signs of ending more settled than it began. A lot of commentary in the markets has been focused on equity movements, but we’ve also seen some big moves in Gilt prices and so it seems a good time to share some insight into Gilts and how this translates to our portfolios.
We’re in a historically low yield environment and logically this suggests that the only way from here is up. In truth this has been the case for years and hitting a new low is an almost weekly occurrence.
The diagram below shows yields have continually fallen during the last five years other than a bit of a jump in 2016 following the EU referendum when nervousness about the outlook for the UK market caused a Gilt sell off.
The driver behind this fall in yields can be traced back to the 2008 global financial crisis when the Bank of England, along with most other central banks across the globe, cut interest rates aggressively and started buying Gilts on a huge scale in an attempt to boost their economies. Lower rates make the returns available on cash look less attractive when compared with other options, like Gilts. This high demand has pushed up bond prices which, in turn, has driven yields down to the current historically low levels.
The future outlook is uncertain and will mainly depend on what you think will happen to interest rates. Under a low growth and inflation scenario there will be no real pressure or requirement to raise rates- however, there’s obviously far more room for rates to rise than fall. Our current view is that a lower for longer position will continue with a bounce back to historic levels highly unlikely.
Within our Governed Range although we’re tactically underweight Gilts across our portfolios we believe that they are still an important part of a diversified portfolio. They help provide shelter during periods of heightened volatility and also provide a valuable link to the change in the price of annuities for those approaching retirement.
However, if rates were to rise quickly Gilt holdings would be challenged and it’s important to have both the capacity to tactically adjust your longer term allocations and to diversify your defensive assets within a portfolio. For these reasons we empower Royal London Asset Management to tactically adjust our portfolios from their long term benchmarks and we also include a range of assets across the fixed interest spectrum as well as allocations to absolute return and cash.
For more information read our latest market update