The yield on 10-year UK sovereign bonds (gilts) reached an all-time low of 1.22% on Thursday 9 June 2016, driven by a lower probability of a June interest-rate increase by the US Federal Reserve, a general shift in sentiment towards risk-off assets, partly on the back of stronger indications that the UK might vote for Brexit, and continued asset-purchase programmes.

The yields on 10-year gilts reached an all-time low of 1.22% on Thursday 9 June 2016.

Owing to the inverse relationship between interest rates and bond prices, UK sovereign bond exchange-traded funds have provided attractive returns in 2016 as 10-year rates began the year at roughly 2%. The Lyxor FTSE Actuaries UK GILTS (DR) UCITS ETF (GILS), the cheapest gilt ETF on the market, has returned 7.6% year-to-date.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown, commented: ‘While all eyes have been on the EU referendum campaign, gilt yields have been slipping, fast. The US Federal Reserve is backing away from interest rate rises following wavering employment data, and in Europe the central bank is pumping billions of euros into the bond market every month in the form of QE, both of which have served to drive yields down.”

Commenting on whether UK gilts should still be on investors’ radar, Khalaf said: “As an investment, gilts still look like a dicey proposition, offering little in the way of return for taking on a bucket-load of capital risk, if sold before maturity. However the strength of the bond market has consistently confounded professional investors, dating back to the beginning of 2010 when bond guru Bill Gross told us the UK government bond market was sitting on a bed of nitroglycerine; yields at the time stood at 4%.

“In the US there is an old saying that you shouldn’t fight the Fed, and over here you probably shouldn’t fight the Old Lady of Threadneedle Street either. Central banks have been successful in driving yields down, to the consternation of the myriad of respected investment managers who have baulked at investing money at such paltry rates of return. It goes to show sometimes even the best, most rational investors get things wrong.”

The trend to record low bond yields is not exclusive to the UK market – 10-year German bunds, the most widely-followed benchmark for the eurozone’s sovereign debt market, touched an all-time low of 0.03% on Wednesday 8 June, and look set to join the negative yield club.

ETFs that investors may wish to consider to gain exposure to Gilts or bunds include:

Lyxor FTSE Actuaries UK GILTS (DR) UCITS ETF (GILS). TER – 0.07%
Vanguard UK Gilt UCITS ETF (VGOV LN). TER – 0.12%
SPDR Barclays UK Gilt UCITS ETF (GLTY LN). TER – 0.15%
SPDR Barclays 15+ Year Gilt UCITS ETF (GLTL LN). TER – 0.15%
iShares Core UK Gilts UCITS ETF (IGLT LN). TER – 0.20%
Boost Gilts 10Y 3x Short Daily ETP (3GIS LN). TER – 0.30%
Boost Gilts 10Y 3x Leverage Daily ETP (3GIL LN). TER – 0.30%

Lyxor UCITS ETF iBoxx Germany 1-3Y (DR) (DU13). TER – 0.07%
iShares eb.rexx Government Germany UCITS ETF (Deutsche Boerse: EXHA). TER – 0.16%
UBS ETF Markit iBoxx Germany 7-10 UCITS ETF (UB96 LN). TER – 0.17%
Boost Bunds 10Y 3x Short Daily ETP (3BUS LN). TER – 0.30%
Boost Bunds 10Y 3x Leverage Daily ETP (3BUL LN). TER – 0.30%