Bryn Jones, fixed income director at Rathbones, says he expects the downturn in growth to occur next year, and with that in mind he has been buying longer-dated government bonds.
Thomas Gehlen, senior market strategist at SG Kleinwort Hambros, says that following a period where he was extremely sceptical about the investment case for government bonds, either as a diversifier or as an income investment, he now views the recent price falls as an opportunity.
He says: "Throughout 2022, markets woke up to the fact that government bonds – traditionally defensive assets – could indeed also be a source of risk and significant drawdowns.
"With interest rates now back to pre-financial crisis levels however, this risk has abated somewhat, and government bonds have reclaimed their traditional characteristics of both protection and income.
"Where there was a Tina (or 'there is no alternative') sentiment driving investors to riskier assets such as corporate credit or equities to achieve acceptable income yields, these can now be comfortably attained with larger exposures to sovereign debt."
Gehlen adds: "As 2022 has shown, gilts are not as risk-free as academia would suggest, but yields are likely closer to their top than their bottom, and the convexity of duration suggests that the pain from any further yield rises should be less than it was a year ago – a jump from 5 per cent to 6 per cent is much less significant than one from 1 per cent to 2 per cent."
Howard Cunningham of Newton Investment Management is another investor who views the recent changes in the bond market in a positive light, noting that at previous price levels government securities were effective neither as an income investment nor as a diversifier.
But he says that gilts (and other G7 bond markets) certainly offer more enticing yield now. The gilt market average yield is now about 4.7 per cent compared to just 1.6 per cent average over the past decade.
Matthew Rees, head of global bond strategies at Legal and General Investment Management, says one does not even need to have a strong view on the direction of interest rates, inflation or other market factors right now to view short-duration government bonds as attractive.
He says: “You can get 5.5 per cent on a very short-dated gilt, being short duration means you don’t have to concern yourself as much with interest rates.”
Having been short duration, Jones says he is gradually increasing the duration in his government bond allocation in anticipation of an economic downturn next year.
