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The great safe haven divide: should you pile into ETFs yielding 1%?

The jury is out on whether low yielding safe havens are still worth a punt, but last week iShares waded in and announced the launch of its top-rated global government bond exchange traded fund.

The jury is out on whether low yielding safe havens are still worth a punt, but last week, iShares announced the (ETF) offering exposure to AAA-AA rated government bonds around the world.

The iShares Global Government AAA-AA Capped Bond fund has been launched at a time when investors are concerned with government bond risk, amid the ongoing eurozone debt crisis and the resulting impact this has on yields.

While offering investors a safe haven, the ETF only yields 1.04%. This is in comparison to UK 10-year notes which are yielding 1.75%, German 10-year bunds at 1.48% and 10-year US Tips yielding 1.72%.

Although many would argue that parking cash with a top-rated government provides a barrier from risk, just how safe is it if the value of your money in real terms is being eaten away at by inflation?

Paul Read, co-head of fixed of fixed income at Invesco Perpetual, only last week questioned the value of the government bond market.

‘I think we have to be very honest about the state of the bond market and say there isn’t a lot of value and questionable value in the corporate bond market,’ he said. ‘Large parts of the markets are fully valued.’

Conversely, Read argued many Western banks are in the ‘opposite of a financial crisis’, adding he is not concerned over the solvency of many banks. To Read, this makes bank debt the better bet.

Government bonds are also not immune from the likely ongoing slow-down in the UK economy and the potential for the UK to lose its AAA credit rating.

Citywire Selection manager Ian Spreadbury, who runs the Fidelity Moneybuilder Income fund, said in a recent conference call that a rating downgrade would pave the way for a spike in interest rates and cause potential turmoil in bond markets.

He said: ‘If growth and inflation took a significant turn for the worse, investors could run scared of fixed interest – it's not likely to happen – but it could happen.'

But managers have been divided on the value of gilts, with some arguing the rally could continue for a while longer on the back of macro-economic concerns, while others believe they are worthless.

Stewart Cowley said earlier this year that in an environment of quantitative easing gilts have been rendered worthless.

At the time he said easing was proving powerless and that on a number of valuation metrics gilts have no value, unless an investor’s primary concern is to hide capital from a banking system prone to shocks.

On the other hand, the fixed income ETF market remains largely untapped versus the equity ETF market, and offering a product to provide a liquid, low-cost way of accessing this theme fills a void.

Whether it is of value now, though, is up for debate.

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Ian Spreadbury
Ian Spreadbury Average Total Return:
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