Recognising the value in government bonds

Recognising the value in government bonds

We see value in government bonds. Keith Balmer, portfolio manager, explains why and how our CT Universal MAP portfolios are positioned to take advantage of an anticipated shift in inflation and interest rate expectations.

While we’ve shifted slightly our overall position in government bonds between UK Gilts and US Treasuries, seeking out relative value, the portfolios continue to hold a high proportion of their assets relative to their history in government bonds. This chart shows why – government bonds now offer the highest yields in over a decade.

Enormous changes in 10 year US real rates

Yield on 10 year US inflation protected security

Source: Columbia Threadneedle Investments and Bloomberg as at 4 September 2023

Specifically, the chart is of the real yield on US Treasury Inflation Protected Securities (the US equivalent of Index-Linked Gilts) The real yield is on top of inflation and is on the most liquid and creditworthy of assets and securities. That real return is now nearly 2% – on a risk adjusted basis that looks very attractive. For context the period of zero interest rates and quantitative easing forced down real returns to -1% per annum. Even for the years preceding that crisis, the average real yield was below 1%, and we can extend that right back to 2011.

However, in addition, we see very big improvements in the drivers of inflation in the US economy that the market really hasn’t recognised. As a consequence, we expect the Fed to cut rates much earlier than people think, with our forecast of a reduction of more than 1% in 2024. Similar factors are at work in the UK. This expected shift in inflation and interest rates expectations will directly benefit capital returns from government bonds.

It’s worth noting that to get to these current attractive yields, long term holders of long-dated bonds have experienced a torrid time, especially by comparison to the period of zero interest rates and quantitative easing. For example, the Treasury 2.5% 2065 issued around £100 as a 50-year gilt in 2015 saw its price hit over £180 in 2020 before collapsing in 2022 as inflation struck, to trade around £62 now. We are positioned to benefit from the reversal of this trend as inflation falls.

Inflation in the United States surprised to the upside in August leading to a spike in government bond yields, due to an increase in expectations for the path of interest rates. However, yields at these levels, above 4.5%, look to be attractive, pointing to future gains when the current volatility subsides and expectations of interest rates starting to fall.

 

Keith Balmer
Portfolio Manager

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle Investments.

Past performance should not be seen as an indication of future performance.

You might be interested in...

4 November 2024

Britain's big Budget - will it work?

The sheer scale of the fiscal changes in the recent budget were surprising, and confirmed growing fears around tax rises. But might UK businesses respond by boosting productivity?
28 October 2024

Looking beyond the UK Budget

The new UK government’s first Budget looks set to be an historic event.
21 October 2024

Will there be any good news in the Budget?

Taxes set to rise but the economy is improving.

Why Columbia Threadneedle for low-cost multi-asset

Columbia Threadneedle Universal MAP redefines value through active multi-asset solutions and business support at a passive price point. Fund OCFs at 0.29%-0.39%.

Our Portfolio

The Columbia Threadneedle Universal MAP and Sustainable MAP ranges offer risk-controlled portfolio options designed to cover a host of client growth, income and sustainability needs.

Important information

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

For professional investors only.

This financial promotion is issued for marketing and information purposes only by Columbia Threadneedle Investments in the UK.

The Fund is a sub fund of Columbia Threadneedle (UK) ICVC III, an open ended investment company (OEIC), registered in the UK and authorised by the Financial Conduct Authority (FCA).

English language copies of the Fund’s Prospectus, summarised investor rights, English language copies of the key investor information document (KIID) can be obtained from Columbia Threadneedle Investments, Cannon Place, 78 Cannon Street, London, EC4N 6AG, email: [email protected] or electronically at www.columbiathreadneedle.com. Please read the Prospectus before taking any investment decision.

The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. The manager has the right to terminate the arrangements made for marketing.

Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EEA by Columbia Threadneedle Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); in Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland. In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium