The ‘safe’ sector that’s benefited from pick-up in market volatility

Concerns over the spread of the new Omicron variant of Covid-19 gave this fund sector a boost in November.

At the end of last month, stock markets around the world fell as concerns over the spread of the new Omicron variant of Covid-19 spooked investors. Many leading stock markets ended up reporting losses for November. As is often the case, when uncertainty forces down equity prices, the price of bonds and gilts rises.

This can be seen in our latest Saltydog analysis, showing the Investment Association (IA) sector performance for November.
 

 
The best-performing sector was UK Index-Linked Gilts, with a one-month return of 4.75%, followed by UK Gilts, which went up by 2.98%.

These sectors contain the funds that invest in UK gilts, which are basically bonds issued by the UK government. They are considered ‘safe’ because the likelihood of the government defaulting on its payments is considered to be very low; so far, they have never missed a payment. The index-linked gilts have the advantage of some built-in protection against rising inflation and potentially higher interest rates, other major concerns at the moment.

Although gilts may be considered low risk, because you can be confident that the half-yearly interest payments will be made and that the bond will be repaid when it reaches maturity, that does not mean they are not volatile. Gilts can be bought and sold through the London Stock Exchange and the prices fluctuate with market conditions. They are particularly sensitive to interest rates as well as market uncertainty.

In our weekly Saltydog analysis, we group the UK gilts and UK index-linked gilts together. Here is an extract from last week’s reports showing the leading funds over the last 26 weeks. Four-week returns range from 3% to 5.5% and, over 26 weeks, they are all up by around 13%.
 

 
Most overseas countries also issue bonds and we include their performance in our combined Global and Global Emerging Market Bonds sector.

Earlier this year, the IA introduced some new sectors to classify them based on their region and type. Below is a table showing their performance over the last six months.
 

 
They nearly all went up in November and the best-performing sector, USD Government Bonds, rose by 4.3%. These are issued by the US government and are similar to UK gilts.
 
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