If you think 10-year U.S. government bonds are a horrible deal at 2.6% yield, then don’t even look at U.K. bonds.
Many expect U.S. inflation to increase in the future, but at least it’s near zero for now. In the U.K. however, government bonds aren’t even paying investors enough yield to cover current levels of inflation, let alone the risk of inflation rising in the future.
Merrill Lynch is ‘discretely’ warning its clients to steer clear:
Simon Miles, Head of Merrill Lynch Portfolio Managers, told me: “Those thinking of applying their hard-earned, taxed savings to UK government bonds or gilts would do well to ponder where we are before reaching into their pocket.
“Gilts yield just over 3 per cent, at best. Consumer price inflation is 3.1 per cent, expected to rise to 3.4 per cent next year. So gilts are not keeping pace with inflation. The UK government needs to issue more bonds to finance its deficit. So supply will increase.
“The steroid effect of ‘quantitative easing’ – whereby the government buys back its own bonds, cannot go on forever. At that point, demand will fall.
“Interest rates in the UK have never been lower in the Bank of England’s 316 year history. It is more likely they will rise from here, than fall. If interest rates rise, the bond you own goes down in value.
There are just too many ways for UK bonds to lose at this stage.