Smart Charts in Focus

Charting Gilt Yields: Better Value in U.S. Treasuries

Despite the Federal Reserve raising interest rates and the Bank of England remaining on hold, we think U.S. bonds offer a more attractive opportunity than UK bonds.

Charting Gilt Yields: Better Value in U.S. Treasuries 

Despite the Federal Reserve raising interest rates and the Bank of England remaining on hold, we think U.S. bonds offer a more attractive opportunity than UK bonds. There are two main reasons for this.

  1. Yield levels: As the chart shows, the excess yield on 10-year Treasuries over 10-year gilts is at a 20-year high, despite the economies having similar characteristics. Both are operating close to full capacity, and if anything, inflationary risks are more skewed to the upside in the UK than they are in the U.S. The main difference between the two economies is that the UK has the added uncertainty of the Brexit negotiations, reflected in the rise in the yield differential since June 2016. However, we think the current low level of UK yields already reflects a bad Brexit outcome, and as such, any less-than-bad outcome could bring higher yields (and lower bond prices).
  2. Return symmetry: As we noted in our secular outlook, there are a number of potential pivot points in the years ahead. If the global economy grows faster than expected, then UK and U.S. bond yields should rise in tandem. However, if the global economy faces a negative shock, there is more scope for U.S. yields to fall (and prices to rise) than there is in the UK. U.S. bonds may therefore be a better source of diversification in the current environment.
The Author

Mike Amey

Head of Sterling Portfolio Management and ESG Strategies

View Profile

For more charts critical to understanding markets, economics and policy, visit our Smart Charts digital library.

Disclosures

The charts used herein are for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of these charts may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. THE NEW NEUTRAL is a trademark of Pacific Investment Management Company LLC in the United States and throughout the world. © 2017 PIMCO.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2017, PIMCO.