Dow snaps ten-day winning streak as investors cash in on gilt

The Dow Jones Industrial Average ended its longest winning streak in more than 30 years on Wednesday as investors cashed in on some gains following the biggest rally this year.

The blue-chip index had surged more than 2,000 points since early February, but gave up some of those advances on Wednesday as selling in the bond market pushed up yields.

"There's been a pretty significant move over the last month or so and a lot of it was predicated on expectations that we're going to see inflation," said Art Hogan, chief market strategist at B. Riley FBR.

"Now we're getting some evidence that maybe that's not the case and the market's starting to price that in."

The yield on the benchmark 10-year U.S. Treasury note hit a four-year high of 2.88 percent, while the 30-year bond yield climbed to 3.16 percent, also its highest level since 2014.

That pushed prices for both bonds lower, which weighed on stock indexes. The S&P 500 lost 0.7 percent and the Nasdaq Composite shed 1 percent.

Technology stocks were among the biggest losers, with Facebook giving up 2.8 percent, Amazon losing 2.6 percent and Apple shedding 1.8 percent.

The Dow Jones Industrial Average fell 1.3 percent to 24,608.98 points, its first decline in eleven sessions and longest winning streak since 1987. The S&P 500 lost 0.7 percent to 2,662.84 points and the Nasdaq Composite dropped 1 percent to 7,108.41 points.[1]

Is gilt the new gold?

The investment landscape has changed dramatically in the last decade, and as investors we must constantly re-evaluate our options to maintain the best possible chance for success. In this piece, we will explore the potential of investing in gilts.

What are gilts?

Gilts are debt securities issued by the British government. They are considered a low-risk investment because they are backed by the government's credit rating. Gilts can be purchased through individual savings accounts (ISAs) or pension plans.

Why invest in gilts?

There are several reasons to consider investing in gilts:

1. Stability – Gilts are a stable investment that offer security in times of market volatility. Because they are backed by the government, their credit rating is very strong and they are less likely to default than other types of securities.

2. Yield – Gilts offer a relatively high yield compared to other low-risk investments such as bonds or cash reserves. This makes them an attractive option for investors who want to earn a reliable return on their money.

3. Flexibility – Gilts can be bought and sold on the open market, which gives investors flexibility when it comes to managing their portfolio. They can also be held in an ISA or pension plan, making them easy to manage and keep track of.

Are there any risks associated with investing in gilts?

There is always some risk associated with any type of investment, but gilts are considered a low-risk option. There is a small chance that the value of gilts could decrease if there is a recession or other economic downturn, but they are still considered a safe bet compared to other types of investments.

Gilt yields hit record low as demand outstrips supply

Investors' demand for German government bonds has outstripped the supply yet again, driving the 10-year Bund yield to a new record low of -0.24%.

The ECB's ultra-easy monetary policy is one of the main drivers of this demand, as investors hunt for yield in a low-growth environment. Low yields make it cheaper for the government to borrow money, and indicates that investors have faith in the country's economic prospects.

The latest data from the Bundesbank showed that foreign investors accounted for 79% of all purchases of German bonds in March, up from 73% in February. This suggests that demand is not just coming from domestic investors, but from overseas too.

Germany is seen as a safe haven investment, thanks to its strong economy and stable political landscape. The eurozone as a whole is benefitting from this investor confidence, with bond yields hitting record lows across the region.

Pension funds turn to gilts as stock markets slump

The changing investment landscape is seeing defined benefit pension funds increasingly turn to the gilt market, as stock markets slump and yields on other assets fall.

According to the latest figures from the ONS, total holdings of UK government bonds by pension funds amounted to £407.8 billion in Q1 2017, up from £392.5 billion in Q4 2016 and £362.6 billion in Q1 2016. This compares with a total stock market capitalisation of just over £1.8 trillion for the FTSE 100 index at the end of June 2017.

Commenting on the figures, director of investment strategy at Jardine Lloyd Thompson (JLT), Nick Atkin said: "With pension deficits ballooning and annuity rates at record lows, DB trustees are being forced to look further afield for yield and stability. Gilts offer both of these qualities and with inflation expectations subdued, they remain an attractive investment for trustees despite Brexit-related uncertainties."

The shift away from equities comes as stock markets around the world have come under pressure in recent months, with investors rattled by concerns over slowing economic growth, political uncertainty and high valuations. The FTSE 100 index has fallen more than 6% since the start of 2017, while the S&P 500 is down more than 8%.

At the same time, bond yields have fallen sharply following moves by central banks around the world to keep interest rates low in order to support economic growth. The yield on a 10-year UK government bond has fallen from more than 2% at the start of 2017 to 1.3% at the end of June 2017.

This has helped make gilts an attractive investment for pension funds, which are looking for low-risk assets that can provide a stable income stream.

Inflation fears send investors into safe havens, such as gilts

As fears of rising inflation mount, investors have been increasingly flocking to safe havens such as government bonds and gilts. Inflation concerns were stoked on Wednesday by news that US wages grew more than expected in January.

The yield on the benchmark 10-year Treasury note – which moves inversely to its price – dropped to around 2.85% on Wednesday, its lowest level in four months. The yield on the 30-year bond also hit a four-month low, dropping below 3%.

Investors have been piling into gilts as well, with the yield on the 10-year UK government bond hitting a fresh all-time low of 1.24%. The yield on the 30-year UK government bond also touched a record low of 1.67%.

The flight to safety has come amid concerns that central banks could start winding down their stimulus programmes, which have been propping up markets for years. In particular, investors are worried that the US Federal Reserve could start raising interest rates at a faster pace than expected.

"People are starting to price in an earlier end to the era of quantitative easing and historically low interest rates, said Oliver Pursche, president at Gary Goldberg Financial Services. "That's why you're seeing this move into bonds and defensive stocks."

Investors have also been selling stocks and buying gold, another traditional safe haven asset. The price of gold hit a three-month high on Wednesday, rising above $1,350 an ounce.