Risk in UK gilts rising, warns FE research

FE, the funds data supplier, says that UK gilts are becoming increasingly risky compared to UK equity, throwing doubt on their safehaven status.

Between 30 December 2011 to 11 May 2012, the data suggests that volatility rose to levels substantially higher than those seen before the financial crisis took hold in 2008. The rising volatility contrasts with the squeeze on gilt yields, which have been depressed as demand for the asset has risen among investors at the same time that the Bank of England’s quantitative easing measures have seen it enter the market to buy massive quantitites of gilts in order to improve liquidity in the UK financial system, particuarly in order to free up the interbank lending market.

FE says that by a measure of its own FE Risk Scores the UK’s Investment Management Association UK Index-Linked Gilt sector volatility has increased by more than 10% since the start of this year, while the IMA UK Gilt sector’s volatility is up by almost 9%. The scores measure volatility compared to the FTSE 100 index, which maintains a constant score of 100.

Oliver Clarke-Williams, Investment Product Consultant at FE, said: “Financial turmoil last year saw a massive rush into gilts which has resulted in high prices and low yields. After last year’s bull run, there is no intrinsic value left in gilts. Notwithstanding the perception that gilts are risk-free because they are government-backed, I expect to see more money flowing into investment grade corporate bonds as investors seek out a real return.”

“Gilts becoming 8-10% riskier relative to an equity index is significant, especially as this happened during a time of market turbulence. This is exactly the opposite of what investors expect government bonds to do; investors usually allocate to gilts as a stabiliser on their portfolios. For investors seeking a safe haven it might be time to look at other asset classes.”

 

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