Gilts claim spot in ii Q3 performance index as investors hunt for yields

investmentweek.co.uk:

Investors were taking advantage of high interest rates by moving their money into the bond market, 'where they are finally being rewarded with attractive yields'.

The gilts in question are the TN25 and TN24, ii found, which made it to the index due to the recent surge in bond yields and the subsequent rise in popularity of bonds, as interest rates are expected to remain higher for longer.

The investment platform said portfolio weightings to bonds have also seen an uptick, with allocations to fixed income and corporate bonds increasing from 0.6% in Q1 2021 to 0.8% in Q4 2022 and 2% in Q3 2023.

Sam Benstead, bonds specialist at interactive investor, said investors were taking advantage of high interest rates by moving their money into the bond market, where he said they are «finally being rewarded with attractive yields», with gilts now paying between 4.5% and 5% a year carrying an «effectively zero» risk of default.

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«Gilts come with the added bonus of being capital gains tax free, which has boosted the appeal of low coupon bonds set to mature soon, where the vast majority on the total return comes from capital appreciation when the bonds mature,» he explained. 

Benstead noted that bonds higher up the risk spectrum, including investment grade and high yield corporate bonds, yield even more. However, he warned that bonds were not risk free.

«While the income from gilts and the return of their principal is secure, their prices can still be volatile, particularly those with a long time before maturity,» he said. 

«Investors reprice bonds based on their expectations for interest rates and inflation, so an unexpected rise in interest rate