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Probably the only long-only investors that enjoyed a good year over 2008 were gilt and other government bond holders. Money poured into the short end of this market as investors sought sanctuary from less certain investments whilst rapidly falling interest rates made the fixed coupons on longer-dated issues suddenly seem really quite attractive.
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In the case of the benchmark gilt (5% 2018), the party did not start until the summer. June 2008 saw this bond trading a tad below par before the bulls took control, forcing the price some 15% higher by Christmas to its recent peak around 115, and dropping the yield available to investors to around 3%.
All in all, Gilts proved to be the last bull market in town. However, cynics might point out that what goes up, comes down...after all, inflation is bound to make a reappearance at some point. What is more, the supply situation looks pretty chunky. The UK government has a hefty programme of issuance ahead of it with £146 billion of debt sales planned in the fiscal year to March alone. To put this into context, the market capitalisation of the entire FTSE250 is only £121 billion!
So, have gilts had their day in the sun? We are not so sure, and it is worth remembering what happened to Japan back in the 1990s. Japanese Government Bonds (JGBs) entered a powerful bull market in the mid 1990s as the unwinding of the overheated domestic economy drove down interest rates to zero. The strength of the market confounded the critics, and each move to a new yield low of 3%, 2% and even 1% was greeted by the common sense observation that "yields can not get any lower". Well, they did, and the 10-year benchmark was yielding a measly 0.5% by 2003 (see chart, below).
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What is perhaps more interesting to note is that this situation has yet to truly reverse. JGB yields have held under the 2% ceiling for a decade. Effectively, JGBs proved to be a bull market without the corresponding crashes that have been such sobering experiences for investors in tech stocks, miners and property. Could gilts follow down the same path? If so, the current yield to maturity of 3.25% for ten year bonds may yet seem a bargain.
Bond of the week is supplied by FixedIncomeInvestor and is subject to their standard disclaimer.
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-IC-2.1.3g-prod - 17/03/2010 18:13:09 - ben.wheeler
