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Gilts lose their glister


Gill Wadsworth writes that the once reliable gilt – largely seen as almost ‘risk free’ and a portfolio mainstay for cautious investors – has fallen victim to extreme market volatility wiping billions of pounds from investor portfolios.

Data from Refinitiv IFR Markets show 30-year gilt yields hit 4.99 per cent this month from 2022’s starting point of 1.1 percent after the government’s heavily criticised ‘mini budget’ caused market chaos.

The Bank of England has since intervened and 30-year gilt yields are back to 4.35 per cent, but the damage has been done.

Big name ETFs have seen years of gains disappear during October with iShares’ GBP1.1 billion Core UK Gilts UCITS ETF returning -25.12 per cent in the year to 19 October while the SPDR Bloomberg UK Gilt UCITS ETF is down -26.18 per cent.

However, outside of those investing in gilts, commentators say that the ETF market has not been unduly affected by the budget back and forth.

Gina Miller, founding partner at SCM Direct, says: “Looking at the primary ETF share class and ranking by size those listed on the London Stock Exchange, the largest ETF to have significant direct exposure to either UK gilts or corporate bonds would rank only 153rd in size. London’s largest ETFs tend to track equity indexes such as the S&P 500, FTSE 100, or MSCI World.”

Miller says that “once again ETFs have shown their resilience and pricing transparency in volatile markets”, and she notes that the recent reversal of most of the mini budget has seemed to have stabilised the situation. 

“UK government 10-year yields are now very close to US 10-year yields, although admittedly as recently as May this year UK 10-year yields were a full 1 percent less than the US,” Miller says

MJ Lytle, chief executive officer at Tabula Investment Management, agrees that ETFs have “functioned efficiently during the crisis”, noting that while spreads have widened this is in proportion to the underlying market, and that creation and redemptions have been available with no reports of failures to provide primary access to the funds.

However, Lytle says the government “needs to restore calm” by addressing the underlying economic issues that prompted the crisis.

“The government picked a very poor time to try and stimulate the economy through unfunded tax cuts.  The lesson of the pandemic should not have been that the government can borrow as much as it likes and not worry about the fiscal consequences. The lesson should have been that governments can take aggressive short-term measures when facing a crisis but always in the context of medium-term and long-term balanced fiscal prudence,” Lytle says.

For investors looking for alternatives to gilts in the current volatile market environment, abrdn’s head of ETFs, Steve Dunn says commodity ETFs and other inflationary-friendly asset classes look viable.

Dunn says: “Despite the volatile market environment, palladium has outperformed the other precious metals by a healthy margin in 2022. Meanwhile, increased foreign currency volatility remains a friend to gold as interest rate differentials have created additional demand for gold in an unsettled environment.”

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