Government bonds performed the role expected of them during the sell-off in March, with prices rising even as equity investors headed for the exit.
But those price rises mean that government bond yields fell even further, to the extent that a ten year gilt currently offers an investor an income yield of 0.2 per cent, which is vastly below the rate of inflation.
An investor who bought a ten year gilt several years ago, when the price was lower and the yield higher, are able to pocket a profit by selling that bond into the market at today’s prices, creating a situation where government bonds are providing capital gain for portfolios, rather than income.
Peter Doherty, head of fixed income investments at Sanlam says: “I think I will always have government bonds in my portfolios, but I view them as a placeholder. I own them until I find an investment I have more confidence in, rather than as a source of return.”
Government bonds rising in value
While government bonds rising in value as economic uncertainty peaks is very much part of the textbook, Mr Doherty adds that they also rose in value because central banks have been buying the assets in vast quantities.
As FTAdviser previously discussed, central banks buy government bonds at times of economic crisis as a way to increase liquidity, reduce the cost of government borrowing, and stimulate growth, a process known as quantitative easing.
Mr Doherty says as a bond investor this creates a problem when it comes to deciding whether to buy government bonds, as the market is distorted by central banks who will buy at any price, and so do not care about achieving an economic return.
But he says the advantage of the central bank’s actions, from a bond investor's point of view, is that constant central bank bond buying means one call always find a buyer, and so have some liquidity in a portfolio.
It is not just central banks that buy government bonds for reasons other than economic gain; commercial banks and insurance companies are compelled to buy them by regulators.
This is because most government bonds are classed as a “risk-free” asset, and banks and insurance companies are required to hold a portion of their capital in those.
To put those figures into context, HSBC has about £350bn of such assets on its balance sheet.
David Roberts, head of the global fixed income team at Liontrust says the actions of central banks will likely mean government bonds continue to be an asset class that has very little volatility.
He says: “Increased central bank QE programmes are designed to allow significantly greater supply without an attendant rise in yields.
