Shares: Gilt-edged chance for investors

IT IS just possible we are coming to the end of an era when UK long-dated gilt-edged stocks can be bought on yields above 8 per cent.

I believe that is the case and also that yields may move sharply lower after what I expect to be a good Budget for gilts, so investors who agree with me need to act quickly.

My speciality is share selections - although I did recommend buying gilts last August when yields were well over 9 per cent - but I am returning to the subject because I see a major investment opportunity. I also think the bull market for bonds now raging across the world is an early indicator of a massive global equity boom.

Many readers may find gilts a complex investment. My preference is to go for a stock that is not going to be redeemed for a long time and where the price is close to par or 100. This makes 8 per cent 2009 a good choice, priced at pounds 9711 16 currently. The running yield (what you are paid each year in interest) is 8.19 per cent. The yield to redemption is slightly higher at 8.25 per cent. If yields fall as I expect, the price will rise sharply, creating the potential for a large tax-free capital gain.

An ingenious strategy put forward by Michael Hughes, a gilts expert at BZW, is to buy gilts with different interest due dates - so a payment is received every month - and spend the money on shares.

Roger Bootle, the Midland Montagu economist, tells me that two years ago he came up with 'Bootle's Vital Statistics for the 1990s'. These are three, six and seven - the numbers he expected to be achieved for inflation, base rates and bond yields respectively. Since the latest figures for inflation and base rates were 1.7 and 6 per cent respectively, it is not surprising he is still keen on gilts.

His argument is that we are now returning to a low-inflation normality. Gilt yields soared in the 1970s when inflation was pushed up by two oil price explosions and the end of the 1960s Bretton Woods era, when the dollar link with gold was abandoned. In the 1980s, asset price inflation encouraged the reckless borrowing that is now being unwound so painfully. These aberrations, as Mr Bootle describes them, are now behind us and gilt yields could fall a long way. In the 1930s, they virtually disappeared, and after the war in the most famous 'cheap money' era, the government was issuing stocks with 2.5 and 3.0 per cent coupons.

The bond bull market is a worldwide phenomenon. In Japan, long bond yields have dropped below 4 per cent and could go close to 3 per cent. In the US, the proposals for cutting the deficit have sent bond prices soaring and yields tumbling below 7 per cent. Even in Germany, yields have dropped from more than 9 per cent to under 7 per cent. If German and other continental interest rates fall sharply, that should keep yields heading down. A major factor keeping bond yields high has been soaring government borrowing. But it now seems the fears have been overdone, particularly in the UK. Recent figures have caused economists to scale down their forecasts for the PSBR. If, as widely expected, the Government uses the Budget to state that buying of gilts by banks and building societies will not be offset by sales of gilts to non-financial institutions, James Capel economists say required gilt sales in 1993-94 may be no higher than 1992-93 levels.

There are plenty of reasons for being bearish on gilts and Chris Anthony at UBS Phillips & Drew talks of yields back up to 9 per cent by the year end. But they would be much lower now if there were no bears.

One simple pointer to the scope for yields to fall is a chart of the inflation-adjusted yield on 2.5 per cent Consols. The latest real return of nearly 7 per cent is almost certainly a post- war record. Something has to give - either yields must fall or inflation is about to take off. I don't believe the latter, which makes me a super-bull on gilts.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
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.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most