In the period from 30 December 2011 to 11 May 2012 there was a significant increase in the FE risk scores for the IMA UK Index-Linked Gilt and IMA UK Gilt Sectors, FE Said.
The first sector rose from 48 to 53, while the latter rose from 34 to 37, indicating greater volatility.
FE risk scores measure volatility compared to the FTSE 100, which maintains a constant score of 100 and in this context the IMA Index-Linked Gilt sector increased by 10.4% while the IMA UK Gilt sector rose by 8.8% so far this year.
Among those sectors showing lower risk scores than gilts were IMA Absolute Return, IMA Global Bonds, IMA Mixed Investment 0%-35% Shares and IMA Mixed Investment 20%-60% Shares.
Oliver Clarke-Williams, investment product consultant at FE, said: "Gilts becoming 8%-10% riskier relative to an equity index is significant, especially as this happened during a time of market turbulence.
"This is exactly the opposite of what investors expect government bonds to do as they usually allocate to gilts as a stabiliser on their portfolios. For investors seeking a safe haven it might be time to look at other asset classes."
Another factor affecting the volatility of gilt funds is the fact they have fewer holdings than corporate bond funds on average.
According to FE the average gilt fund contains 27 holdings, compared to 193 for the average corporate bond fund and so it is easier for corporate bond funds to diversify away stock specific risk.
As at 11 May the IMA Sterling Corporate Bond sector had an FE risk score of 25, while the IMA Sterling Strategic Bond sector’s score was 22.
Bond managers on safe haven status
At a recent fixed income conference hosted by BNY Mellon, a panel of bond fund managers discussed the reputation of gilts as a safe haven, alongside other developed market stalwarts, US treasuries and German bunds.
David Leduc, chief investment officer of active fixed income at BNY Mellon-owned Standish, said: "The definition of safe haven changes over time, as the situation changes. There’s going to come a time when somebody is going to question owning US treasuries at such low yields given the structural problems, just as emerging market debt used to be put in the high yield bracket.
But Paul Brain, investment leader of fixed income for another BNY Mellon subsidiary, Newton, said: "When you have got a central bank that is willing to buy them and pension funds belatedly making fixed income allocations from equities, and when you have fears surrounding China’s prospects, global growth and the eurozone, the definition of safe havens comes from market reactions. When investors get worried about risk that safe haven category is still, at the moment, clearly defined."
