The yield on the ten-year Gilt yield has come down since the Budget, if only by a few hundredths of a percent, but Chancellor Sunak will be delighted all the same, given his comment that a full percentage point change equates to £25 billion on or off the nation’s interest bill on its debts,” says Russ Mould, AJ Bell Investment Director.
For all of Mr Sunak’s efforts to start tackling the £2 trillion-plus aggregate deficit, even he admits that spending will continue to outstrip tax receipts for some time to come, adding to that figure. This again can only fuel the debate over whether Gilts still have a place in investors’ portfolios as part of a balanced asset allocation.
“Mr Sunak did not gild the outlook for Gilts when he gave the Budget, acknowledging that borrowing would continue to rise.”
This asks three questions of investors who have fixed-income exposure in their portfolios:
- Why should anyone lend the UK money (and therefore buy its Government bonds, or Gilts) when it oh-so-clearly does not have the means to pay them back?
- Why should anyone lend money to someone who cannot pay them back in return for a yield of just 0.72% a year for the next ten years (assuming they buy the benchmark ten-year Gilt)?
- Why would anyone buy a ten-year Gilt with a yield of 0.72% when inflation is already 0.7%, according to the consumer price index, and potentially heading higher, especially if oil prices stay firm, money supply growth remains rampant and the global economy finally begins to recover if, as and when the pandemic is finally beaten off? Anyone who buys a bond with a yield of 0.72% is locking in a guaranteed real-terms loss if inflation goes above that mark and stays there for the next decade.