Is now the time to start buying UK Gilts?
With the Bank of England ramping up its Quantitative Tightening (QT) program, the dynamics around UK gilts are becoming increasingly intriguing. The BofE’s aggressive offloading of bonds has not only driven up yields but also sparked debate about its impact on the cost of servicing the national debt. Public finances are under immense strain, with only around £9 billion in fiscal headroom, while the QT program has already added roughly £30 billion in additional costs.
Meanwhile, the Pound has taken a hit, sliding back to levels not seen since the fallout from the 2022 mini-budget crisis. Combine this with rising recession fears and growing concerns over the sustainability of US equity market returns, and the case for diversifying into gilts starts to look compelling.
With yields hovering around 5%, UK gilts are offering what is effectively a risk-free return that hasn’t been seen in years. For investors who’ve been riding the equity bull market, this could be the ideal time to start reallocating toward fixed income, particularly as the likelihood of a long-term slowdown in equity returns grows.
The question is: at what point does this become a no-brainer? If gilts continue to offer strong yields while the macroeconomic outlook worsens, we might be looking at one of the best opportunities in the next decade to lock in substantial returns with minimal risk. I have to say, if I was close to retirement (which I’m not), this would definitely be a no-brainer right now.
Is it time to rotate out of overvalued equities and into gilts for some diversification? Long term, of course, the S&P will win, as it always does, but it’s whether we think the bull run can continue for another 10 years, or for long enough to gain another 46% before the bonds mature.
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