Signs of a resolution of the crisis in the eurozone, as well as fears over the UK’s credit rating and budget position, combined to cause this effect as bond investors sold gilts.
In spite of this increase in bond yields, however, equity yields are still a long way ahead. The bond market is still considered by many commentators to be exhibiting signs of a bubble.
If and when this bubble bursts, a large wall of money will flow into alternative asset classes, the most obvious naturally being equities.
Based on Capita Registrar forecasts for 2013, including the likely effect of special dividends, equities in the UK are currently yielding 4.5 per cent gross, slightly higher than at the end of the third quarter of last year.
There is a wall of money set to come out of bonds at some point, and it is likely to find a home in the equity markets. Yields on shares still far exceed bonds.
The headline growth rate will slow sharply in the first half of 2013 owing to the base effect of the big special dividends from Vodafone and Cairn in 2012, and the absence of a payment from HSBC in the first quarter.
Excluding special dividends and the timing change from HSBC, FTSE 100 dividends fell an unexpected 0.7 per cent in the fourth quarter year-on-year.
The prospective yield on the FTSE 100 index is 4.6 per cent gross, while the FTSE 250 index offers 3.3 per cent to its investors in the coming year.
In the fourth quarter, increases in rents mean that the yield on property crept up by another 0.1 per cent, to 5.4 per cent, but after the cost of running a property, that yield is a mere 3.9 per cent before tax.
Cash continues to languish well behind, at 2 per cent.
It is clear that equities continue to offer the best prospect of income for investors. Not only that, but they offer the opportunity of income growth, as well as the potential for capital returns. Of course equity investors take a risk on their capital too.
Holding government bonds to maturity is a risk-free endeavour, but offers a very low return.
However, there are risks to capital if government bonds are not held to maturity, particularly if you belong to the school of thought that bonds are currently in a bubble.
Justin Cooper is chief executive of Capita Registrars
