Government BondsJul 23 2018

Investors told to avoid gilts despite economic weakness

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Investors told to avoid gilts despite economic weakness

Investors should avoid government bonds despite economic indications that they should be good value, a fund manager has said.

David Roberts, head of global fixed income at Liontrust, said he would not be willing to invest either his own cash or his clients' cash into UK government bonds right now.

He said while the economic data has been poor, implying weak growth, lower inflation and therefore a reduced chance of the Bank of England putting interest rates up, higher UK interest rates are typically bad for the investment case for gilts.

This was because higher rates increase the attractiveness of cash as an alternative.

Mr Roberts said despite the increase in global economic uncertainty over the past year, the yield on a UK government ten-year bond has remained unchanged at 1.2 per cent.

Government bonds are traditionally viewed as a safe haven asset, so if global uncertainty increases, demand for the bond should increase, pushing the yield down.

If the level of economic uncertainty increases, but the yield on a UK government bond doesn’t fall, it implies that the market views UK debt either as not a safe haven, or as already having the level of uncertainty reflected in the price.

Mr Roberts said if there was a Brexit "disaster" then sterling would be expected to fall in value, which would lead to inflation and a reduction in the spending power of the income an investor receives from gilts.

He said this would reduce the appeal of the asset by more than the demand for it might increase from investors buying the bonds as a safe haven.

Mr Roberts said: "It is highly likely we will see another turbulent 12 months for all things British. It may be we see more turbulence than we have in the past year but buying gilts at a yield of 1.2 per cent and expecting a return even in line with inflation needs volatility and uncertainty to move even higher still.

"How long will investors, domestic and international, continue to support the UK economy in exchange for uneconomic levels of return?

"With each passing Brexit vote, the challenges for the May administration appear to grow. Political uncertainty, a falling currency and uncertain economic future can easily turn from being bond positive to negative. Ask the Argentinians or Italians."

Peter Elston, chief investment officer at Seneca Partners, said he would "rather stick my hand in a food mixer than buy gilts" right now.

This is because he thinks UK interest rates will rise, and this will push the price of gilts down, because investors will then rather buy the gilts issued in future, at the higher interest rate, than the ones in issue now, at the lower interest rate.

Edward Park, an investment director at wealth manager Brooks MacDonald, has been buying gilts with a short date to maturity.

He said this was to protect against the risk of an economic downturn which could emanate from the US.

david.thorpe@ft.com