Gilt yields fall to lowest in two years

German government bond yields hit a new record low on Tuesday as investors bet on continued monetary stimulus from the European Central Bank (ECB).

The benchmark 10-year Bund yield fell 2 basis points to 0.046 percent, its lowest level on record. The two-year Bund yield hit a new low of -0.364 percent, down 5 basis points on the day.

The ECB is expected to unveil fresh stimulus measures at its meeting next Thursday, including another round of quantitative easing (QE), which could push yields even lower.

"The market is expecting more support from the ECB next week and that is keeping Bunds and other government bond yields in Europe very low," said Orlando Green, strategist at Credit Agricole.

Low yields mean that investors are willing to accept relatively small returns in order to hold German debt, which is seen as one of the safest investments in the world.

Investors pile into government debt

Governments around the world have been issuing more debt in recent months as investors have sought out safe havens amid concerns over a global economic slowdown.

The US government has seen its borrowing costs decline to record lows, with the yield on the 10-year Treasury note dropping below 2% this week.

Japan and Germany have also seen their borrowing costs fall in recent months as investors flock to their bonds.

Analysts say this indicates that investors are becoming more concerned about the global economy and are looking for safe places to invest their money.

"There's a lot of nervousness in the market at the moment," said Priya Misra, head of global rates strategy at TD Securities. "Investors are looking for places to park their money and government debt is seen as a safe haven."

The demand for government debt has helped to push up bond prices and push down interest rates. The yield on the US 10-year Treasury note, for example, was at 2.05% on Friday, down from 2.26% at the start of the year.

Some analysts warn that the recent rally in government debt could be short-lived if investor sentiment improves or if economic data starts to improve.

Yields fall as concerns over Brexit recede

Investors have been piling into government debt as the prospect of a no-deal Brexit has diminished.

The 10-year yield on German bunds fell below 0.1% for the first time on record, while the 30-year yield hit an all-time low of -0.5%.

Yields on British gilts also plunged, with the 10-year yield hitting a new low of 0.6%.

This flight to quality has pushed down yields on riskier assets such as corporate bonds and equities.

The S&P 500 Index has fallen by more than 6% since its peak in late September.

Experts warn of 'gilt bubble'

Over the past few years, a number of market observers have warned about the increasing risk of a so-called 'gilt bubble'. This is the name given to the potential for prices in UK government bonds – or gilts – to become inflated, as investors drive up their value in anticipation of ever-lower interest rates.

In recent months, however, there have been signs that this may already be happening. The yield on 10-year gilts has fallen below 1%, while 30-year yields are now just above 2%. This means that investors are prepared to lend money to the government for thirty years at a rate of only 2% per year. In effect, they are betting that inflation will stay low and that the Bank of England will not raise interest rates in the foreseeable future.

Some experts argue that this situation is unsustainable and could lead to a sharp correction in bond prices. They point out that, if interest rates do start to rise, investors may not be able to afford to hold onto their gilts and will be forced to sell them at a loss. Others argue that there is no immediate danger and that UK bonds still offer good value compared with other assets such as shares or property.

'Giltagged' investors miss out on bumper returns

In the hunt for outperformance, many investors turn to so-called "giltagged" stocks - companies with market capitalisations of more than $1 billion and that rank in the top third of their respective industries for dividend yield.

However, a study by investment research firm Morningstar has found that investors who held these stocks between 2004 and 2014 missed out on bumper returns.

The study looked at the performance of the S&P 500 Index, an index made up of 500 large US companies, and compared it to the performance of an index made up of only giltagged stocks. It found that while the S&P 500 Index returned an average of 7.5% per year, the giltagged stocks index returned only 5.8% per year.

This is largely due to the higher valuations of giltagged stocks. The Morningstar study found that giltagged stocks were consistently more expensive than non-giltagged stocks, with a price-earnings ratio that was on average 20% higher.

So why do investors continue to flock to these high-yield stocks? One reason may be that they are seen as a safer investment. Giltagged stocks are typically less volatile than their non-giltagged counterparts, meaning they are less likely to experience large swings in price. And for income-focused investors, this stability can be appealing.

However, as the Morningstar study shows, investing in giltagged stocks comes with a trade-off: lower returns. So while they may be a safe bet, they may not be the best bet if you're looking for growth potential.