Record low government bond yields – good or bad news?

Today’s FT launches on the significant headline of record low gilt yields (see here). Within the article it discusses a number of issues from quantitative easing to Bill Gross’ famous quote regarding the UK “resting on a bed of nitroglycerine” (which was something we took issue with at the time as commented here).

However the new revelation for me today was the opinion that “low gilt yields are bad news for savers and pensioners that rely on interest for income”. At face value true, but what about reality?

If you are a current saver or pensioner and own gilts, or indeed any other good quality bonds, then you have had a cracking year, and a cracking decade. The asset class has been in a huge bull market.  Surely that is a position in which a saver wants to be?

If you are about to start seeking an income from government bonds by saving in the asset class then yes, income returns are at historic lows. However for existing investors, record high prices and low yields are presumably good news. If investors think the asset class is now unattractive, at least they have the capital gains and option to buy into an asset class whose performance has lagged and where yields have not fallen to new lows.

The concept that a bull market is bad news for investors is indeed true if you own none of the asset class, but similarly a bear market in equities is great news for pensioners and savers if they have yet to allocate to the asset class.

So regarding record low government bond yields being good or bad news, as always with investments, it depends on your position.

Discuss Article

  1. Bernard King says:

    It is hard for pensioners – especially those in pension fund withdrawal.

    Their income is calculated on several factors – one being the yield on the 15 year gilt which is at 2.56% today. It has to be difficult when they come up for a review having gone into drawdown 5 years ago when yields were at c.4.5%.

    Indeed, earlier this year GAD re-wrote the table to calculate basis amounts – as the previous tables only went down to a 3% yield!  

    Let’s just hope advisers hedged out the risk of falling yields [somewhat] by holding these instruments within the client’s portfolio.

    Sadly, I think that this may not be the case and clients [in some cases] are seeing a 40% decline in income!!!

    Ouch!  

    Posted on: 11/11/11 | 11:36 am
  2. Ken Lorp says:

    The last time that gilt yields were this low was after WW2 (late 40’s / early 50’s). In the subsequent 2 decades, bond investors lost somewhere around 70% of their investment.

    This is the real risk that no-one seems to have yet considered!

    Posted on: 11/11/11 | 12:47 pm
  3. Ian Bright says:

    Richard – your comment is correct but I suspect few people who are forced to manage their own pension (i.e. those on DC schemes) have participated in the long term rally in bond markets. Pension providers and pension advice often recommend a high weighting (even 100%) in equities for anybody with more than 10 years before retirement. Even a prudent person adopting a “life style” fund would be “caught” by the poor performance of equities compared with bonds over the past 10 years.

    Posted on: 11/11/11 | 1:54 pm
  4. Bull run on gilts | Macro Exposure says:

    […] Vigilantes has a very interesting post about the bull market in gilts (and it can be applied to bunds and treasuries as well). Large […]

    Posted on: 15/11/11 | 12:04 am

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