This is because, as the BoE reduce their bond holdings, they are compensated by the Treasury.
He says much of the issue around there being a guaranteed seller in the market is already “reflected in the price”, and so he regards gilts as a “very attractive” investment right now.
Davis is also positive on gilts with a shorter date to maturity, saying: "The risk-free returns on the shorter dated gilts offer a preferable alternative to cash, given the tax benefits on many of the low coupon issues. The shorter dated the gilt, the less sensitive it will be to changes in the base rate.”
Fahad Hassan, chief investment officer at Albemarle Street Partners, says that while the circumstances he describes above would typically imply that gilts are a poor investment right now, he adds that yields are at near record highs on some gilts, meaning the prices are at near record lows.
He adds that new buyers are finding reasons to own gilts: “The high nominal yields have attracted strong demand from domestic pension funds and insurance companies that need to match long-term liabilities. Overseas investors have also been drawn to gilts, given relatively higher yields compared to other sovereign bond markets.
"The impact on yields also needs to be analysed considering wider macroeconomic factors. High inflation remains the primary driver of gilt yields in the near term. If inflation comes down in the coming months, it will overwhelm any yield impact from gilt issuance.”
A challenge for investors seeking opportunities in the gilt market is to balance the potential high yields on offer now with the capacity for loss if the price of the bonds falls.
Quentin Fitzsimmons, co‑portfolio manager of the Dynamic Global Bond Strategy at T Rowe Price, says as central banks are no longer buying bonds, the outcome could be that yields remain persistently higher than many investors have been used to and limit the capacity for capital gains from bonds.
Price matters
In terms of valuation, Christopher Mahon, a multi-asset investor at Columbia Threadneedle, says that while both the BoE and the US Federal Reserve began to reduce their QE programmes at the same time, gilt prices have fallen by a significantly greater amount than US government bond prices.
And it is due to this valuation metric that he is keen on gilts right now, taking the view that investors who invest now are buying near the bottom of the cycle, despite the challenges faced by the wider market.
