Dampier: When will investor attitudes change on gilts?

16 July 2012 | By Mark Dampier

Anyone who hasn’t looked at a chart plotting gilt yields since 1990 should do so now. It is a sobering experience for two reasons. Firstly, because so many (with the notable exception of David Kauders) missed this great bull market; and secondly because some now believe it can go on for ever. I am not sure which is scariest.

Many bond fund managers and asset allocators have called the end of the bull market in gilts for the past few years and have been spectacularly wrong. Ten-year gilt yields are around record lows of 1.6%. I am sure they will eventually be correct, but given the amount of debt around the world and the lack of deleveraging that has taken place so far, it suggests to me the situation isn’t going to suddenly reverse.

Gilts, rightly or wrongly, are being bought by the Bank of England through QE; pension and insurance funds; and indeed by banks in order to meet solvency and regulatory requirements. We also shouldn’t forget those seeking a so called safe haven from the euro zone debt crisis.

At present being bearish on gilts feels like standing on a railway track trying to stop an express train. With growth at such anaemic levels gilts, bunds and US treasuries could remain at these levels for some time, or even head lower in the shorter term.

The key question is: what will change investor’s attitudes? Will it be valuations or some seismic event? Perhaps some political row which refocuses global markets on our own debt problems. I really have no idea, but I think it is one of the biggest conundrums facing fund managers and advisers at present.

At some stage this incredible bull market will end and it will be painful. When it does I can see the regulators looking at mis-sold lifestyle pension plans and perhaps an even bigger mess – Nest. Younger people could be put into what will be termed a ‘low risk’ investment (gilts) at quite possibly the worst time.

Despite this I am still a fan of corporate bonds, but recognise that as they are priced off gilts, bunds and US treasuries, there will come a time to change my mind (maybe at short notice). I don’t know about the rest of you, but this is one thing that keeps me up at night.

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