Why investors are buying gilts again: Higher yields (and a tax trick) mean bonds are back in favour

Once upon a time, the word “commitment” was associated with a feeling of confidence. But recently, some recall the remarks of James Carville, President Clinton’s strategist, who said: “I thought if there was a reincarnation, I wanted to come back as president or pope. But now I would like to come back as a bond market. You can intimidate anyone.

It was probably a humorous comment, but investors were spooked by events this month in the global bond market — the $128.3 trillion worth of fixed-income stocks issued by companies and governments around the world to raise funds.

Some UK investors have sold bond funds in the past month. This may be a justified response to the poor performance in 2022, when the average fund fell 22 percent, as Chris Rush of wealth manager Iboss reports.

But if you’re thinking longer term, it might be worth heeding the remarks of Michael Hartnett, head of portfolio strategy at Bank of America, who expects “bonds to be the best-performing asset class in the first half of 2024. as recession fears begin to recede.

Recession fears and the belief that interest rates will stay “higher for longer” sparked a sell-off in bonds earlier this month, pushing up yields on those stocks — which move inversely to prices.

The yield on US 10-year Treasury bonds (T-Bonds) jumped to 4.8 percent, a level last seen during the global financial crisis. In the UK, 30-year hog yields rose to 5.1%, their highest since the Asian financial crisis.

Yields are down a bit this week. In a sudden reversal of sentiment, bonds have regained some of their safe-haven reputation. This is the result of an escalation of geopolitical tensions following the Hamas attack on Israel.

The prospect that interest rates may not be raised again is also driving yields lower.

The US Federal Reserve and the Bank of England raised interest rates to reduce inflation by discouraging spending. But higher yields are thought to have the same effect, albeit indirectly, by affecting the cost of borrowing for businesses and households.

But even before some calm returns, other experts are making the case for bonds.

Former pessimist Mike Eakins, chief investment officer of Phoenix, the retirement savings giant that owns Standard Life, is shifting to gilts, calculating that interest rates may be near their peak.

Wealth managers are also more optimistic. Atomos’ Haig Bathgate commented: “We don’t think interest rates will rise much further – if at all – and so we are happy to buy and hold and accept short-term negative sentiment and volatility.” You can now lock in a near 4.5 percent yield on 10-year gilt, which looks very attractive on a three-to-five-year basis.

“But corporate bonds are more difficult because there is a high probability that some of them will default if interest rates continue at their current high levels.”

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Dan Boardman-Weston of BRI Wealth Management points out that gilt profits are not subject to capital gains tax (CGT) – a valuable advantage for higher and additional rate taxpayers, especially since the annual allowance for this tax has been halved to £ 6000. Therefore, it is worth considering females with low “coupon” or interest rates, which are usually offered at lower prices.

Says Boardman-Weston: “Let’s say you put money into a gold coin maturing in June 2025 that is trading at about 6 percent below ‘par’ – that’s the face value at which it will be redeemed at maturity – and it pays interest rate of 0.7 percent. You buy £100 worth of assets for £94. When maturity occurs, the entire increase in value will be tax-free, meaning you lock in a generous return.

“In my opinion, hogs are better value than they have been in 16 years.”

The platforms make it relatively easy to choose a selection of gold plated animals by checking their coupons and expiry dates. But a bond can be a simpler route, even though the tax breaks aren’t on offer.

The iShares UK Gilts All Stocks Index Fund offered by Boardman-Weston holds bonds of various maturities.

Interactive Investor’s best low-risk buys are the Vanguard UK Government Bond Fund and the Vanguard Global Bond index if you want an international mix of corporate and government bonds.

Chris Rush likes the L&G Strategic Bond fund and the M&G Optimal Income fund because he believes their managers have the experience to make the most of current opportunities “without taking undue risk”. This is another point to note at this uncertain time in our history.

If you want peace of mind rather than excitement, the potential for earnings and tax breaks, HSBC’s one-year bonds (to be drawn next week) offer 5.7 per cent.