Managers return to gilts as 3% yields signal buying opportunity

Signs of a strengthening UK economy pushed benchmark 10-year gilt yields back towards the 3% mark in Q4 2013 and at the start of this year, signalling a buying opportunity for some portfolios.

Invesco Perpetual’s multi-asset team, led by former GARS managers Richard Batty (pictured), David Millar, and Dave Jubb, have moved long gilts as part of a pair trade in their Global Targeted Returns fund.

David Coombs, head of multi-asset at Rathbones, has begun reintroducing 10-year UK government bonds back into his portfolios, and said he would keep buying if yields continued to rise.

Elsewhere, M&G’s head of retail fixed interest Jim Leaviss has also made tactical additions to gilts within his go-anywhere Global Macro Bond fund.

Managers have grown more interested in gilts after a year in which benchmark yields rose by 100bps and equity market yields continued to drop.

With valuations looking fuller across many asset classes,  Coombs said he is putting some of his cash pile to work buying UK government bonds.

“We bought 10-year gilts on 2 January when yields hit 3.07%, and we are now looking at 3.15% for the next purchase,” he said.

“We are looking to offset equity risk, and we do not see any value in corporate bonds. We could see 10-year gilts go to 4% next year, and we will be buying all the way up to 4% and increasing the tranches.”

Invesco’s multi-asset team, on the other hand, said gilts are attractive because they are pricing in an overly optimistic view of the domestic recovery.

The team initiated a long UK gilts versus German bunds trade in the fund in late 2013 – a time when benchmark gilt yields were trading at 2.8%-2.9% – and pointed to a historically wide spread between the two.

“We acknowledge the robustness of short-term economic data in the UK, but believe there are some structural rigidities in the economy which make a lasting, strong recovery less likely,” said Batty.

“These include limited credit availability and high general leverage, while an extended housing market is increasing sensitivity to interest rates.”

Batty added Invesco’s fixed income team, headed by Paul Causer and Paul Read, has also been looking at the long gilts versus short bunds idea.

For other fixed income managers, the opportunity is more tactical.
In November, M&G’s Leaviss bought up gilts maturing in 2025, but his fixed income team now suggests UK base rates may rise before the end of 2014, a move which would have a negative effect on government bonds.

UK 10-year gilt yields

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