In case you hadn’t heard, the UK and the US are heading to the polls this year, giving Asset Allocator an excuse to write about a topic close to all our hearts: government bonds.
We had a look at exactly how allocators choose to split their portfolios between the various govvies on offer and we’ve monitored how the predilection for Treasury and gilt funds has changed over time.
Casting back to May 2023, the lay of the land among the portfolio managers we cover was that of indifference: their weightings to Treasuries and gilts was more or less equal at around 3 per cent each - with a greater exposure to gilts of only 0.3 per cent.
But over the course of nine months, we witnessed a market shift away from T-Bills and into UK government debt - a trend which has only been solidified in recent months.
In mid-2023 there was a greater exposure to gilts of 1.75 per cent and this has now risen to 2.09 per cent.
Allocators now hold just 2.5 per cent in US treasuries, while their gilt holdings have hit almost 5 per cent.
It is also worth noting that there has been a modest increase in the average allocation to European government bond funds, with several allocators opening positions here to bring the average exposure to 0.12 per cent.
One allocator has also recently opened a position in Vanguard Japan Government Bond Index.
Handelsbanken and Progeny lead the charge as those most invested in gilt funds, with 15 and 13 per cent parked here respectively. Similarly, they both avoid US Treasuries entirely, indicating a strong domestic preference.
Of course, all of the allocations mentioned are to gilt or treasury funds specifically, and some allocators - but not a huge number - use global government bond funds.
The fact that overall government bond exposure has remained broadly static at 8 per cent of the balanced portfolios we monitor suggests the flows have been largely directed from one side of the Atlantic to the other.
This could be based on the higher yield offered on gilts, or a sense that the UK could be later to cut rates than the US.
M&G is one of the fund houses to have taken initiative: in December, the team told us they’d introduced a new allocation to index-linked gilts, while increasing their allocation to both the US and UK.
Shanti Kelemen, chief investment officer at M&G Wealth, said she sees more opportunities in fixed income than equities entering 2024.
Meanwhile, Alex Harvey of Momentum informed us that the combination of higher rates and falling inflation gave him a strong signal to add to their already-increasing bond allocations in the back end of last year.
He pointed to their purchase of nominal treasuries at 5.25 per cent yield in October before trimming back at a lower yield in December, creating a 16.5 per cent return.
Their buoyancy is reflected across the wider industry, too. Our most recent pulse check found that 70 per cent of the DFMs we cover are optimistic on fixed income in general, with just five per cent expressing negativity.
By far the most popular area of fixed income going into 2024 was found in government bonds – with two-thirds of these optimistic on the asset class.
Such confidence has translated into action: fixed income exposure is at its highest level since the inception of our database, standing at just under 30 per cent.
