For those building portfolios, two criteria both need to be satisfied.
Firstly, the investment must offer good value. Secondly, it must fit with the identified future requirements that the client is saving for.
Throughout the long years of quantitative easing many advisers concluded that gilts did not offer good value.
The Bank of England clearly wanted investors to sell their gilts to the BoE, not to be buyers of them, and the central bank's interventions were of a scale to move the market price. However, today the gilts market looks very different.
Fiscal uncertainties, accelerated by the Liz Truss/Kwasi Kwarteng "mini"-Budget announcement of September 23 2022, led to UK 10-year gilt yields rising from 1.9 to 4.5 per cent within just two months (by the end of November 2022).
And yields remained at roughly this level throughout 2023, still today standing at 4.07 per cent, according to the Financial Times – close to that initial peak. Investors may wonder how long such a market opportunity will last.
According to Barclays analysts, 10-year yields retreated roughly 18 months after the last central bank interest rate hike (albeit historic performance is never a guarantee of future performance).
The last BoE interest rate increase, to 5.25 per cent, was in August 2023 and that could well be the high watermark as inflation appears to be stabilising and even beginning to fall now.
It is worth looking at where gilt yields have moved from. They became relatively unattractive during periods of QE when the government of the day buys its own bonds to increase money supply.
The latest lengthy period of QE ran from 2009 to 2016 in response to the global financial crisis (over £455bn went in then). The BoE turned the taps back on in November 2020 by buying billions of pounds of bonds in response to Covid-19 pressures. Most of those billions of pounds (£875bn in all) bought UK government bonds.
Today’s situation is all rather more stable than either the artificially stimulated QE years or the ‘dash for growth’ era that characterised Truss’s 44 days as prime minister.
Whoever wins the general election will inherit this government’s recent tax cuts and even modest public spending will probably need fresh gilts issuance to finance it.
Indeed, in February, the Treasury took the unusual step of opening up their latest new gilts issue to retail as well as institutional investors. The supply and demand position suggests that gilts are probably fair value at present. One clear advantage for those buying gilts is that they are capital gains tax free.
This may be highly relevant for clients’ tax positions, as the CGT tax-free allowance has fallen from £12,300 in the 2022-23 tax year to £6,000 last year, and only £3,000 in the current tax year just started.
