'Safe haven' UK bonds beat the rest of the world

Gilt prices trump even German bunds and US Treasury bills with a 17 per cent return

Buyers of British government debt enjoyed better returns than investors in any other state debt market this year.

This is partly because of the UK's safe-haven status and partly because of falling growth expectations. Gilt-edged securities – bonds issued by the UK Treasury to finance government spending – have returned 17 per cent on average this year, including capital gains and reinvested interest.

None of the other 25 major government debt markets tracked by Bloomberg and the European Federation of Financial Analyst Societies have performed better over the past 12 months. Although equity investors have had a miserable year, with the FTSE 100 closing down 5.55 per cent on the year yesterday, UK bonds have uniformly risen in value.

UK debt outperformed other traditional safe-haven investments such as Germany, whose bunds were up 10 per cent on the year, and the US, where Treasury bills yielded 9.7 per cent. Gilt yields – which fall when the traded price of government debt rises – hit an all-time low yesterday; the interest rate on 10-year bonds dropped to 1.92 per cent, before ending at 1.98 per cent.

Analysts have attributed the popularity of gilts to a number of positive factors ranging from the monetary activism of the Bank of England to the fiscal credibility won by the Chancellor, George Osborne. Overseas investors have been strong buyers of gilts over the past year as they have sought a safe haven for their funds outside the eurozone. "The UK may not be in a much better shape than countries in that region but it has its own currency and monetary policy to deal with the problem," Russell Silberston of Investec Asset Management told Bloomberg.

But economists have also identified Britain's rapidly weakening economy as one of the main reasons for plummeting gilt yields. The growth outlook is so bleak that investors expect the Bank of England to keep interest rates low for a prolonged period and to engage in further gilt purchases next year, which will act to support bond prices.

"Clearly fiscal credibility has been a big part of the gilt story, but the other force is that the UK economy has tanked," said Nicholas Spiro of Spiro Sovereign Strategy. "The main reason gilt yields are at historic lows is because of the completely changed environment in terms of growth," he added.

The strong performance of UK gilts in recent years has come as a surprise to some investors. In January 2010 Bill Gross, the co-chief investment officer at the giant US bond investment firm Pimco warned his clients to avoid British government debt. "Gilts are resting on a bed of nitroglycerine" he said.

Mr Gross has since changed his mind and now forecasts that gilts will outperform US Treasury bills and German bunds again next year.