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Gilts are bond certificates with gilded edges issued by the British Government and the term gilt describes a bond with a low risk of default. The year 2023 was a better one for gilts, helped by a sharp decline in yields from mid-October.
If 2022 marked the end of a 40-year bull market in bonds, just viewed from starting and end points (the solid and dashed lines) some stability returned in 2023. However, as the dotted lines showing the end of September curves indicate, en route, there was plenty of volatility.
The UK began the year with a CPI inflation reading (for November 2022) of 10.7% and ended with the rate (for November 2023) having more than halved to 3.9% - a near mirror image of 2022. In an effort to quell inflation, the Bank of England increased the Bank (Base) Rate fives times in 2023, taking it from 3.50% to 5.25% in August, at which point it has since paused. The gilt market’s reaction to the combination of Bank Rate hikes and inflation was to ramp yields up, with the ten-year bond going from 3.7% at the beginning of the year to 4.75% by mid-August. Thereafter yields were relatively stable until mid-October, at which point the market started to think that all the higher-for-longer talk had run its course. Thus the ten-year yield ended at just under 3.6%, marginally below its January start point.
There was a similar picture for index-linked gilts. The FTSE Index-Linked All-Stocks Index ended the year with a real yield of +0.73%; a year ago it was at +0.43%, having reached +1.52% in mid-October.
The IA bond fund indices broadly follow the picture outlined above for gilts and show how other fixed interest securities fared better than gilts, as the odds on a serious recession faded, and with the accompanying risk of insolvencies,:
IA sector | 2023 total return |
UK index-linked gilts | 1.7% |
UK gilts | 4.5% |
Sterling Corporate Bond | 9.7% |
Sterling Strategic Bond | 8.0% |
Sterling High Yield | 11.1% |
Source: Trustnet
The US Federal Reserve raised the Fed Funds rate four times in 2023, taking it from 4.25%-4.50% to 5.25%-5.50% The movement of US Treasury bond yields (blue lines on the graph) was similar to the UK’s, with rates peaking in mid October before dropping sharply, helped by December’s dot plot. As in the UK, corporate bonds outperformed their Government counterparts, with the best returns from high yield.
Source: Techlink Professional
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