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Should you steer clear of UK government bonds?

21/10/2022

Government bonds – or gilts – essentially involve investors lending money to the government. The investor receives interest payments at defined intervals, and when the loan term has ended, the full loan amount is repaid. 

As the loan is to the government, rather than to one or more companies, gilts are often seen as lower risk than other bond types. However, with the UK’s political and economic stability having been rocked in recent years, should you steer clear of government bonds?

 

Sell-off in progress

Bank of England data reveals that foreign investors sold £16.6bn-worth of gilts in July alone: the largest market sell-off in four years. Since the start of 2022, gilts have declined in value by £283.8bn, with the 14.8% drop described as the largest fall since the 1980s. 

A number of managers are shorting gilts, believing that high inflation rates are set to continue for the foreseeable future. 

 

Damaging diversification?

Traditionally, investors often include bonds (including gilts) in their portfolio as they’re seen as a low-risk, “safe haven”: an addition that will reduce the overall risk and volatility of their portfolio. However, prices have been plummeting as a result of inflation fears, and with the gilt yield curve now inverted, as it did before the 2008 financial crisis, many experts are predicting economic disaster for the UK. 

Gilt yields may be rising, but it seems that many are no longer relying on them as the “safe” part of their investment portfolio.

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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