Ten-year gilt yields rose steadily in the first two months of 2018 to a high of more than 1.6% (figure 6). They fell back slightly from late February, but even at these levels UK government bonds are once again looking like a viable alternative to holding cash in portfolios.
We have long believed that with yields so low, gilts offered little advantage over cash for a typical diversified portfolio and were vulnerable to capital losses.
The threat of higher inflation and rising interest rates spooked global stock markets in February and pushed up government bond yields. We expect the trend of rising yields to persist and be a dominant investment theme over the coming year, with implications for equities.