Hedge funds turn to UK gilts as safe haven amid market turmoil

UK government bonds, known as gilts, have long been perceived as dull or intimidating by many investors, but a growing number of hedge fund managers are now championing them as a robust shield against market volatility and inflation. These professionals argue that the negative news surrounding gilts is already priced in, making them an appealing alternative as concerns escalate over the lavish spending by US tech giants on artificial intelligence. The gilts market, which has existed since the 17th century, has consistently honored its promise of returning the invested capital at maturity, a feature that underpins its reliability. Recently, the yield on the 10-year gilt climbed to 5.04 percent, reflecting a period of heightened market anxiety, particularly regarding interest rate policies in Japan and the United States. Despite a weak jobs market and inflation that has not surged as much as feared from higher oil prices due to the Middle East conflict, gilts are being positioned as a defensive asset. Aaron Hussein, a global market strategist at JP Morgan Asset Management, emphasizes that government bonds serve as the best hedge or protection against such economic uncertainties. While the S&P 500 has risen 13 percent this year and the FTSE 100 is up 8 percent, gilts offer a different kind of security. UK Treasury Bills, known as zero-coupon bonds, provide returns through the difference between their purchase price and face value; for instance, buying at £97.50 and receiving £100 at maturity yields 2.65 percent, which annualizes to 5.12 percent. Moreover, capital gains on gilts held to maturity are exempt from capital gains tax, a significant advantage. Sarah Coles of investment platform AJ Bell highlights the appeal of very low coupon gilts issued during the pandemic when interest rates were near zero, such as the Treasury 0.125 percent January 31, 2028, currently priced at £94.48. After accounting for savings tax, the effective yields for basic, higher, and additional rate taxpayers are 3.6 percent, 2.7 percent, and 2.5 percent, respectively. Investors can purchase gilts directly through the Debt Management Office, the Treasury agency responsible for issuing them. Some may be tempted by the 5.7 percent yield on the Treasury 5.375 percent 31/10/2056 Gilt, but such long maturities carry risks over three decades. For those seeking a simpler approach, exchange-traded funds like the iShares Core UK Gilts or the Vanguard UK Gilt offer diversified exposure. While diversification comes with costs, the current environment of generous yields and the government's money-back commitment makes gilts an increasingly attractive option for investors looking to protect their portfolios.