Investments

Gilts slump to record low as Brexit fears bite

Government bonds are no longer a guilty pleasure for investors as 10-year UK rates have hit a record low and are cited as a risky investment by some financial experts.

Investors have long viewed the guaranteed returns from gilts as a safe haven in times when markets are volatile or falling.

Now yields have sunk to 1.115% – almost half the value offered a year ago when the same bonds were returning 2%.

During last year, Bank of England governor Mark Carney and other leading bank figures called for calm and argued that markets and interest rates would come good in the early part of 2016.

Well, they haven’t and in fact that seem to have got worse as the world economy has stuck in a rut and interest rates have continued to languish at a record low of 0.5% since March 2009.

Yields linked to interest rates

Gilt yields are generally linked with the interest rate and savers look for better returns as the rate rises.

However, a stalling world economy has led the Bank of England to hold a planned rate rise as growth and inflation dropped in the UK.

Now, an interest rate rise is not expected before the end of 2017 and the Pound is weakening due to uncertainty over the Brexit referendum on June 23.

Gilt rates are suffering as a result of poor economic data and fears Britain may pull out of the European Union.

As foreign investors buy gilts as a safe haven for their cash are frightened off by Brexit concerns and the underperforming economy, less cash is coming into the UK and is heading for gold and the higher returns of Us government bonds.

Risky assessment

“A low yielding government bond paints a pessimistic picture of the global economy and suggests we are set for an extended time of low or even negative inflation, and weak economic performance,” said Laith Khalaf of fund managers Hargreaves Lansdown.

“As an investment, gilts still look like a risky proposition, offering little return for taking on a lot of capital risk if sold before maturity.”

Khalaf explained that equities are offering a better return than gilts for the moment – between 3% and 4%.

Leave a Comment