If government bonds are in portfolios to dampen volatility, they have been distinctly poor at their job over the past year, but the allocators we follow seem to be content to take the higher yields and ride out the storm.
Looking back over our database of cautious portfolio allocations, DFMs’ exposure to government bonds has spiked from 11.6 per cent in October 2022 to 15.7 per cent today, marking an almost-400 basis point shift in a year, October 2022 was the month of the infamous mini-budget and right at the start of the current rate hiking cycle.
A similar trend can be seen in balanced portfolios, where government bond exposure has risen from 5 per cent in late 2022 to around 7 per cent now.
The most telling find in the data came from our sentiment indicator and could signal that elevated exposure may be here to stay.
As of September, allocators rated government bonds the most optimistically of all asset classes.
63 per cent of respondents expressed a positive sentiment on the instrument, with just 13 per cent expressing a negative outlook.
Contrast that with allocators’ outlook on US equities and you’ll see that just 14 per cent of DFMs are positive here.
We recently wrote about the uptick in government bonds at Evelyn Partners, who last month added exposure to two government bond funds: Vanguard US Government Bond Index and CG Dollar.
It’s little surprise that Vanguard dominates the government bond sphere, leading the pack in every key region.
12 allocators own its US Treasuries fund, eight own its UK gilts fund, 3 own its Eurozone debt fund. A further eight own Vanguard’s global bond fund.
In recent months one DFM has bought the Vanguard Japan Government Bond fund.
Treasury yields have traded higher and higher in recent months as investors digest the likelihood of more US government borrowing, while the Fed looks increasingly likely to commit to higher-for-longer interest rates.
In the cautious portfolios we monitor, Handelsbanken has the largest exposure to government bonds, at 32 per cent, while 7IM and Abrdn each have 30 per cent there.
At the other end of the distribution, You Asset Management, has zero allocated there, while Premier Miton provides meagre rations for government bond fund managers, with an allocation of just 0.3 per cent to the asset class.
While the level of exposure to government bonds in the cautious and balanced portfolios we monitor has risen, the overall exposure to fixed income in cautious portfolios has remained broadly static, at around 53 per cent over the past year.
Some of this is likely accounted for by the drop in ownership of high yield funds, from 3.1 per cent to 2.8 per cent over the course of the past year.
Of course, with the yields on government bonds higher, it is entirely logical that allocators, particularly those looking after clients with a low tolerance for risk, no longer feel the need to reach for yield.
But those same clients may also be chafing at the higher than typical levels of volatility from government bonds right now, presenting DFMs with a particular dilemma when it comes to their fixed income exposure.
