Rathbones' Jones warns of risks in gilts

Rathbones' Jones warns of risks in gilts

UK government bonds could rise in price after a disorderly Brexit, but any gains could be wiped out if Jeremy Corbyn is elected Prime Minister, according to Bryn Jones, head of fixed income at Rathbones.

Many investors, including Trevor Greetham, a multi-asset investor at Royal London Asset Management, believe that gilts, which are UK government bonds, will perform well in the event of a no deal Brexit as investors will buy the asset as a safe haven.

But Mr Jones said while data about the performance of gilts backed this analysis, investors should not disregard the "Corbyn effect" on the longer-term bond market.

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The price of gilts tends to rise whenever a negative piece of news emerges about the Brexit process.

But Mr Jones noted while the yield on bonds with a short date to maturity fell on such news - as the price rose - the yield on gilts with a longer date to maturity rose at the same time - as the price fell.

The fact bonds with a longer date to maturity are already trading at a significantly lower price than those with a shorter date is a sign of the "Corbyn effect" on the bond market, according to Mr Jones.

He said market was concerned that a disorderly Brexit could increase the chances of a general election, and a victory for the Labour Party, led by Jeremy Corbyn.

The expectation then would be that a Corbyn-led government would increase borrowing.

This extra borrowing would lead to the issuing of more gilts, and with the supply of gilts on the market increasing while demand is falling, that would lead to the price of gilts falling.

Peter Elston, chief investment officer at Seneca, recently told FTAdviser he would "rather put his hand in a blender" than buy gilts for his funds.

He feels Brexit will make little difference to the direction of UK interest rates, which, in his view, is likely to be upwards, meaning investors who buy gilts today would lose money.

This is because if the Bank of England put interest rates up, the return available to investors from owning cash would rise, and that would force the UK government to pay a higher rate of interest on any new bonds it issues after rates rise.

If investors can buy the new bonds at a higher interest rate than the existing bonds, then the owners of the older bonds, would be forced to take a lower price for the bonds they own.

But David Scott, an adviser at Andrews Gwynne in Leeds, told FTAdviser last week the level of uncertainty in markets right now meant government bonds, such as gilts, may be an attractive investment relative to equities.