Investors’ risk goes unrewarded

Williams, who manages funds at gilt specialist Charteris, says gilts offer liquidity and transparency advantages over corporate bonds. He adds that over the past five years there has been a tendency for downgrades of corporate bonds to outnumber upgrades. Gilts also have the advantage of consistent valuations and narrow bid/offer spreads.

The manager believes that the potential problems for gilts – higher interest rates and increased government issuance – have largely been priced into the market. He believes that a further 0.25-0.5% rise in interest rates is already reflected in yields, adding: “The 30-year end of the gilt market is already pricing in interest rates of 5%. The expectation is there.”

There is more danger of the Bank of England missing its inflation target on the downside now that the basis for calculating inflation figures has been changed. Williams says it is no coincidence that the Government has altered its basis for measuring inflation before an election, as it makes rate rises less likely.

On the Chancellor’s spending plans, he says: “There will certainly be extra borrowing by the Government and there will be an increased supply of government bonds. But we have lived through the past few years with a dearth of supply. As long as it is a trickle and does not turn into a flood and get out of control, it should not be a problem. As a percentage of GDP, the UK is not out of line.”

Williams says that big budget deficits and high-yields do not always go together: “Japan has a huge budget deficit and yet has the lowest bond yield of all. While, intuitively, most people believe that budget deficits lead to higher yields, it does not necessarily follow. It depends on what else is going on in the world.”

He concludes: “The outlook for gilts looks pretty stable. As long as inflation figures do not spike up, it should continue to be a benign environment.”