0333 241 9900

News and Articles

An overview with Guy Myles

Investment Committee Update: US Treasuries

Guy Myles, 26 April 2018

One of the key changes we have made in 2018 has been the inclusion of United States government bonds to the Flying Colours portfolios.

The investment enhances the profile of our portfolios in several ways and I would like to share some of these with you.

Firstly, and most obviously, the US Treasury market is offering investors a superior yield than UK Government Bonds.

While UK Gilts are traditionally seen as the risk-free asset class for a UK investor - yields are currently sitting at very low levels. At the time of writing, a ten year gilt - a UK government security maturing in ten years' time - is yielding 1.5%; this compares with a 3.0% yield from the equivalent ten year Treasury.

This matters, as with fixed income assets the starting yield is by far the most significant driver of future returns.

Secondly, and perhaps less obviously, is the lower risk from investing in US Treasuries. Here we are not referring to default risk; the risk of default from either bond is essentially zero. Instead we are referring to interest rate risk, or duration of the two markets.

The UK Government has been issuing debt with longer and longer maturities. This means for index investors like Flying Colours, holding a Gilt fund exposes us to greater and greater interest rate risk.

The iShares UK Gilts All Stocks Index Fund which we have chosen to invest in has an effective duration of 11.35 years. By contrast, the Vanguard US Government Bond Index fund has an effective duration of just 5.97 years.

Duration measures the sensitivity of the fund to changes in interest rates - the higher the duration, the greater its losses from rises in interest rates.

This means the Vanguard fund is roughly half as sensitive to changes in interest rate rises compared to the Gilt tracker, and historic volatility is also around half that of the iShares fund. As a result, we see the move as a significant enhancement to our more cautious risk profiles.

Guy Myles Chairman, Flying Colours Investment Committee


Categories: Investment Insights

Related Articles

Q2 Market Review 2018

16 July 2018 / Guy Myles

Book your free consultation

Friendly, approachable and no pressure

Cookie Preferences

Select the cookies below to help us personalise and enhance your experience on this site. We will remember your choice for 90 day, but you can change your mind at any point by clicking the manage cookies link in the footer of our website.

For more details on the exact cookies we use, please read our privacy policy.

Necessary cookies

These are cookies that are required for the operation of our website. They include, for example, cookies that enable you to log into secure areas of our website and use our services. We also have contractual obligations with paid traffic sources where we are required to provide statistics on conversions. We use cookies to track this.

Always Active

Performance (analytics) cookies

We use performance cookies to gain an understanding of how people discover and navigate our website, and on which type of device. This helps us to improve our website by making informed decisions on real world data.

Targeting cookies

These cookies are set through our site by our advertising partners. They enable us to track the effectiveness of our advertising so that we can target our marketing spend in the most cost efficient way. Some advertising partners may choose to show you adverts on other sites relevant to you based on your browsing.