According to Last Word Research, net sentiment towards the category swung dramatically by 30 percentage points during the quarter, from -22% of net buyers in Q4 2017 to 12% in Q1 this year. This is up from a low of -26% in Q2 2015.
Pan-European fund selectors, however, remained negative over the quarter with -23% of net buyers of the asset class.
Yields on most developed market government bonds have been at rock bottom lows, negative levels in fact, because swathes of bond buying by central banks in recent years as part of their QE programmes has pushed yields to record lows.
In August 2016, the UK 10-year gilt plumbed new depths at 0.52% while the lowest point for US treasuries with the equivalent duration was 1.367%, in July 2016.
This has essentially meant investors paying for the privilege of lending to governments.
The renewed interest from UK investors in developed market government bonds could be explained by the return of volatility during the quarter, which typically triggers a flight to safety into safe haven assets such as government bonds, gold and loans.
Add to this the recent winding down of monetary stimulus and the 10-year US treasury yield smashing the psychological 3% barrier and some portfolio managers have seen a signal to buy.
But with the 10-year UK yield still at 1.5% is it too early to get excited on government bonds across the board?
Richard Philbin, chief investment officer at Wellian Investment Solutions says, simply put, he is starting to see more value in government bonds.
With 10-year treasuries passing through the 3% mark, Philbin believes they are giving a better reward for less risk than many European credits so why take the risk with a company going bust compared with the US government, for instance?
“There is an argument that you are getting better diversification as well compared to many bond managers out there, so you are getting arguably lower risk, better returns and greater diversification as there is less correlation,” he says.
“Add to this the view that the US dollar will strengthen against sterling and another benefit kicks in. On top of that, you are getting a real return as the yield is higher than inflation.”
Of the developed market governments, Philbin notes that with the UK and US central banks in quantitative tightening mode, bonds need to be issued at higher rates as interest rates rise. However, this isn’t going to happen in Japan or Europe anytime soon, he adds.
Gavin Haynes, managing director at Whitechurch Securities, says the firm has had little in developed market government bonds in recent years, struggling to see the value given the low yields on offer. The firm still has no direct exposure to gilts, having sold its index-linked gilt exposure last summer on valuation concerns.
However, Whitechurch recently added a position in US treasuries as 10-year yields approached 3%.
Haynes says: “This position provides good insurance to protect portfolios if we see a worsening of the economic environment and in our view does represent value in an interest rate environment where we continue to follow the ‘lower for longer’ mantra.
“Given that we have some recent US economic data softening and little inflationary pressures, we believe further interest rate rises will be modest.”
For David Roberts, head of global fixed income at Liontrust Asset Management, yields at around 3% are starting to look “worth a punt” and the firm “just bought a little US debt” in the Liontrust GF Strategic Bond portfolio.
“It is more attractively priced than for the past five years and we prefer to buy bonds that have fallen rather than those on the rise,” he says. “It is still too early to move to a full market/peer group/index risk weighting but increasing our beta from around 0.7 to 0.8 at the new improved level makes sense.”
