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David Roberts
David Roberts 12-10-21

Plan B only makes government bonds more overvalued

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise.

With Boris Johnson announcing his “plan B” to ward off Omicron, or deflect attention from matters at Number 10, UK bonds have risen and the currency fallen in anticipation of a delay to rate hikes from the Bank of England.

One reason cited for a potential delay is that the economy would need further support from “cheap money”. Whilst there is economic validity to that, it is worth noting just how cheap money already is from the perspective of HM Treasury, the paymaster of the Bank of England.

Of course, what is cheap for the Treasury is expensive in the extreme for those lending to her. The near 10% plunge in value in the first quarter of 2020 has all but been all but forgotten as government bonds have rallied in recent months. An investment strategy built around owning them is just an accident waiting to happen.

Inflation stands at multi decade highs and is set to move upward in early 2022. That erodes the purchasing power of bonds. And even before we adjust for inflation, those bonds are already at very expensive levels. For example, investors are only paid about 0.7% per annum to lend to the UK Government for 10 years. That compares with nearly 1.5% in the US or looking further afield 2.5% in New Zealand.

In normal times, investors expect to be compensated for inflation. Indeed, over the past 40 years, investors in gilts have been paid a yield on average 2.2% above inflation. Today, those investors are paid a record low of 3.5% below inflation and some 5.7% below the norm since 1990.

While the short-term outlook for the gilt market is shrouded in Omicron mystery, one thing we can say with a great deal of confidence is that there is very little long-term value on offer here. We have taken a contrarian, very low-duration position as we await the market realisation that inflation is here to stay. If and when this happens, we expect to uncover lots of alpha investment opportunities.

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Key Risks 
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies which may have the effect of increasing volatility. Some of the Funds may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.


This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
David Roberts
David Roberts
David Roberts joined Liontrust in January 2018 from Kames Capital to co-create the Liontrust Global Fixed Income team. David was previously Head of Fixed Income at Kames Capital and since 1988 has also worked at Britannia Investment Managers and Lloyds Bank.

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