Mark Dampier: Gilts have room for one last hurrah

The Analyst

I will return to the bond market this week, which continues to be a hot topic of conversation in investment circles. I have recently had two interesting conversations with Stewart Cowley, who is head of fixed interest at Old Mutual and manages the Old Mutual Global Strategic Bond Fund.

The mandate of this fund enables him to invest just about anywhere when it comes to bonds, such as government bonds, corporate bonds and currencies across the globe. Mr Cowley formerly worked at Newton, where he used to manage significantly more money, but he wanted to make his mark in the more boutique culture at Old Mutual.

One of the biggest debates at the moment is whether we should be worried about inflation or deflation. If either deflation or high inflation take hold, they can seriously cripple an economy, while it is generally accepted that a low level of inflation is the least-worst outcome.

In some countries there is already deflation, and in the UK, if we use the RPI index, deflation is here. However the CPI index (the official measure of inflation) is still showing inflation of 1.8 per cent. Mr Cowley believes that we face no inflation problem at the moment, indeed the problem is that most of the money injected through quantitative easing is locked up in the system (and, therefore, is not filtering through to the general public).

His most controversial view is perhaps that he thinks gilts could easily have one last hoorah before the seemingly inevitable bear market. He expects the yield on a 10-year gilt could fall to around 2 to 2.5 per cent. If that happens then, in capital terms, you would make around a 20 per cent profit. Before you get too carried away remember that this is not a trade for the faint-hearted – at some stage over the next few years, inflation will start to come back into the system and the possibility of the credit worthiness of the UK or US being downgraded cannot be ruled out.

Bonds, and corporate bonds in particular, have remained hugely popular with private investors, leading many commentators to suggest a few months ago that this was a bubble. At the time I argued this view was nonsense, since, for there to be a bubble, there had to be a huge overvaluation and this clearly wasn't the case. Even after this sharp rally there is still good value to be found, but you have to buy more carefully, with stock selection being the key.

One of the biggest calls over the next few years will be neutralising the danger of rising yields. Many people will struggle to achieve this, but one of the beauties of buying into a strategic bond fund is that you can leave it to the fund manager to do the job for you. That's not a guarantee, but my feeling is that a professional has a far better chance of getting it right than most private investors.

For the time being I believe that bonds will continue to do well. Interest rates are not going to go anywhere for at least a year, possibly 18 months, while unemployment is still rising and will continue to do so for the next two or three years. Taxes will rise next year and the public sector should, by any measure, be cut back. All of this is taking money out of consumers' pockets and, while I can see a recovery, it is going to be a long, slow grind – not a big lurch up.

My conclusion is that corporate bond funds, while unlikely to repeat the last six months in terms of capital growth, are still likely to do better than cash. Some investors may be better off investing in a strategic bond fund that will make that decision for them.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

    Crisp sales are in decline

    As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

    Barcelona vs Bayern Munich player ratings

    Lionel Messi scores twice - but does he score highest in our ratings?
    Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

    Explosive batsman who sets the range for Kiwis' big guns

    Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'