Jonathan Harris, Product Manager – Global Fixed Income, Schroders, looks at the current state of the UK gilt market…
Since the credit crunch, the UK economy has embarked upon a slow and steady path to recovery, despite strong headwinds, while gilt yields have struggled to return to levels that are more consistent with the current economic backdrop. Although there are some very valid reasons why UK gilts yields are so low, we are worried that the risks are skewed towards higher yields. The problem for gilt investors is that the transition from lower yields to higher yields means that prices fall, and this could result in negative returns for gilt investors.
The main thing that we can put in place to mitigate the risk of rising bond yields is to reduce interest rate risk so that returns are less sensitive to rising yields – a strategy we have held for some time now. This view has clearly been challenged as yields have actually moved lower, but we maintain a strong conviction that yields will move higher over the medium term, and we have adopted a defensive approach to provide some protection to investors against what we believe to be a significant risk to their capital from higher yields.
