Gilts and gold shine amid March banking sector madness

UK Index Linked Gilts were the best-performing sector in March, according to FE Analytics, as the collapse of Silicon Valley Bank, and UBS’ rescue of Credit Suisse, signalled that the rate hiking cycle might be ending soon.

Fixed income has been popular among investors since the turn of the year, and Annabel Rudebeck, head of non-US credit at Western Asset, argued now marks an attractive entry point for the asset class.

In Franklin Templeton’s Megatrends Accelerate Webcast Series, Rudebeck said the events in the banking sector did not constitute a “full-blown” banking crisis, and, as a result, there were good opportunities to be found in credit, especially for some of the higher quality financial sector names.

Given the current banking situation, government bonds have returned to their traditional role of providing diversification in a risk-off period, according to Ben Yearsley, director of Fairview Investing. He found that four of the five top-performing sectors in March were to be found within the asset class.

Yearsley identified that government bond markets have been in a state of flux since the collapse of SVB and Credit Suisse, owing largely to the uncertainty surrounding a possible central bank pivot, but that yields were coming down.

“The US 10-year closed March with a yield of 3.47% having started the month paying 3.92%. The equivalent 10-year Gilt now pays 3.49% compared to 3.82% a month ago. The markets are betting on the latest round of hikes being the last, compared to a month ago when markets expected slightly higher rates than anticipated”, Yearsley said.

A tough month for financials

The banking-sector wobble fuelled record outflows from banks into money market funds, according to Yearsley, and few would be surprised to hear that it was March’s worst-performing sector.

Yearsley said: “The Financial and Financial Innovation sector fell 7.88%. With two mainstream banks essentially going bust, and the Fed and other central banks having to put emergency liquidity measures in place, even healthy financial stocks were put under pressure.

“North American Smaller Companies was second-worst performer last month – lots of small regional banks can be found here as well as companies reliant on funding from them. The Property Other sector, often viewed as a financial, also took a tumble and fell 6.49% as investors speculated about debt re-financing issues.”

Yearsley argued that equity markets came out largely unscathed, though the FTSE ‘s high mix of oil and financials left it down for the month. He said most other markets were up in March, though the FTSE Small Cap index fell by over 5%.

The Nasdaq gained 4.96% and Hang Seng rose 3.48%.

Returns as good as gold

While investors sought safety in fixed income last month, it was gold that dominated the best-performing funds, occupying the top eight places; an ounce of gold neared what Yearsley called the “mythical $2000 mark”.

As uncertainty continues, investors are seeking to protect themselves with hard assets, said Nitesh Shah, head of commodities and macroeconomic research at Wisdomtree.

Speaking before the Fed’s policy announcement, she said: “If the Fed doesn’t soften its hawkish stance, it risks transforming a bank liquidity issue into a recession as risk appetite and confidence has been shaken. If the Fed does act either by terminating quantitative tightening or prematurely ending the hike cycle, the central bank’s monetary largess will linger for longer.

“Either way, gold is likely to benefit,” she concluded.