Fund managers see opportunity in the volatile bond markets of late but advisers are less keen to adjust their portfolios to capitalise on them.
Gilt yields spiked in mid January in the wake of similar spikes in the US. Fund managers such as Quilter Wealth Select sought to capitalise on these by increasing the fixed income allocation in their mixed assets portfolios.
Portfolio manager Stuart Clark said rate cuts at the time had not been priced in for UK government bonds but were anticipated, meaning prices were lower than might have been expected.
The Bank of England did indeed proceed to cut rates on February 6, when it took 25 basis points off the main rate in a majority of seven to two – the remaining two MPC members wanting a bigger cut of 50 basis points.
Gilt yields had surged in the opening weeks of 2025, with the 10-year gilt yield reaching a high of 4.91 per cent in mid January before falling back to 4.57 per cent by the end of the month. The two-year gilt reached highs of about 4.6 per cent and then fell back to 4.25 per cent.
They now stand at 4.49 per cent and 4.16 respectively (February 10).
According to Hargreaves Lansdown there was a peak in gilt purchases in January, with figures reaching the highest point in four years.
AJ Bell also reported a 31 per cent increase in gilt purchases among advisers in January 2025, compared with the previous month.
But Philip Dragoumis, director and owner at Thera Wealth Management, said he had made no changes to client portfolios specifically related to the January rise in gilt yields.
He said: “Gilts just like treasuries have been volatile these past couple of years as the market (just like the central banks) is very data dependent, hence the violent reactions to inflation announcements.”
Though he said bonds continued to play an important role in client portfolios as a diversifier, “[they] are yielding above inflation and will act as a hedge to a market correction and recession”. He added: “Care needs to be taken about duration – clients with lower risk profiles should have shorter dated bonds with less sensitivity to yield changes.
“Despite the panicked cries from the right wing press the UK is not undergoing a sovereign debt crisis and there are no indications that this is imminent.”
Trader David Belle, who is founder of Fink Money, said he saw an opportunity in buying TG61s – government bonds that mature in 2061 – which had slipped in price between December and January.
He said: “I bought more TG61s because the Bank of England keeps bottom ticking them in an environment where they really need to be cutting rates.
“What’s more, it makes a bit of sense from a capital gains tax increase perspective if your bet is that [chancellor Rachel] Reeves will keep raising capital gains through to 2028 (which is my base case).”
UK government gilts are exempt from CGT.
But Anita Wright, chartered financial planner at Bolton James, also said she was unwilling to try to time the bond markets.
She said: “We have observed that both the UK and the US are implementing policies likely to fuel inflation. In this environment, it is difficult to see how bonds can perform strongly as an asset class.
“In the short term, there is pressure on central banks to lower interest rates, and it is likely that this will occur.
“While short-term interest rate cuts may present a brief window of opportunity for those willing to take the risk, investing in bonds would require precise timing to avoid losses as prices fluctuate and as advisers we don’t run our portfolios on this basis.”
She did not deny that there could have been opportunities for those willing to seek them out as the prices of bonds declined in line with their rising yields.
But she added: “Navigating this space requires careful judgement and a willingness to act decisively.
“From a longer-term perspective – over the next two years – I remain extremely cautious and would advocate for a significantly underweight position in bonds.”
carmen.reichman@ft.com
