Using a rolling one-year measure, IMA UK Index Linked Gilts is historically the most volatile of fixed income sectors, followed by IMA UK Gilt.
The UK Index Linked Gilts sector has consistently been the most volatile bond sector over the last 10 years.
Source: FE Analytics
UK gilts are perceived to be the safest place to invest money because the probability of the Government going bust are remote compared with corporations or individuals.
However, the data reveals that the average fund in the Sterling Corporate Bond sector has never been more volatile than Government debt funds over the last decade.
The data dispels the assumption that UK debt is the best shelter in uncertain markets. Sterling Corporate Bond funds have not only been less volatile, they have also rewarded investors with better returns.
Over the last three years the average UK Gilt fund has returned 15.19 per cent with an annual volatility score of 6.71 per cent, while the average Corporate Bond fund has returned 38.11 per cent, with 4.77 per cent volatility.
Performance of sectors over 3-yrs
Source: FE Analytics
Rob Gleeson, head of research at FE, says that the fluctuating prices in the gilt market can make investments unpredictable and hard to manage.
"People often mistake volatility and risk," commented Gleeson. "The credit risk in UK Government bonds is very low, but the investment risk - the price variability measured by volatility - is quite high. This is because investors change their minds about gilts a lot. People flock to them when things look bad and abandon them at the first sign of recovery."
"It is the fluctuation in demand that causes the volatility. Whatever the merits of an asset class, its value is ultimately subject to the whims of the market and the government bond markets in particular are quite fickle."
Last year gilts were the most successful asset class. The average UK Index-Linked Gilts fund returned 21.25 per cent over the period. However, with losses of 4.74 per cent, the sector has been the worst performer so far in 2012.
In 2008, Iceland was brought to the brink of bankruptcy when its government ran into difficulties refinancing its debt liabilities. The crisis emphasised the risks associated with high levels of government debt and called into question the role of sovereigns as safe havens.
The ongoing sovereign debt crisis in Europe has continued to raise concerns about the risks associated with investing in government bonds, as debt-to-GDP ratios have risen ever higher in some of Europe’s peripheral economies. Investors and politicians have had to contend with the very real threat of a Greek default and that anxiety has weighed on global equity markets.
Throughout 2011 investors fled to perceived safe-havens such as the UK in a bid to protect their assets. The yield on 10-year gilts has fallen to as low as under 2 per cent.