“In recent weeks, we have been arguing for an overweight position in UK gilts. This has been a good call, as 10-year gilt yields have dropped 33 bps over the last two weeks, back to levels that last prevailed more than one month ago, while gilt-to-Treasury spreads are now 31 bps tighter from their recent wides,” Borges said in a note last week.

“Looking ahead, we continue to find value in gilts at current levels for a few reasons. First, even after this rally, 10-year gilt yields remain nearly 60 bps higher than the levels that prevailed at the end of February, before the Iran war started. This is more than in any other developed market,” Borges continued. “Hence, there is still plenty of room for gilts to continue to outperform should we see clearer evidence that the Iran war is heading towards a resolution.”

“Second, last week’s weaker-than-expected UK domestic data confirmed one of the pillars of our argument. As we argued, a longer conflict should lead to negative growth momentum in the UK economy, which would either outright prevent the Bank of England (BoE) from delivering on the hiking expectations that markets have already priced in, or alternatively mean that it will not be able to hold rates in restrictive territory for too long,” Borges said.

“Third, as we have reiterated on a few occasions, the fiscal and issuance outlook for the UK government is more favourable than for other developed market economies. Over time, this should support a normalisation along the UK Treasury yield curve. Putting these pieces together, the backdrop for gilts remains asymmetrically favourable, and we would still add here,” Borges said.

Despite the market volatility, a number of investors have been actively investing in the UK gilt markets. Darius McDermott, managing director at . “We have talked about the old normal – where bond yields are in the 4-5 per cent range we saw pre-financial crisis, pre-quantitative easing. We believe that year-in/year-out the majority of bond returns will come from income – roughly the same as the 4-5 per cent yield,” Roberts said.

“The past 12 months have been volatile, tricky. Surprisingly perhaps the yield on core US treasuries is almost unchanged over that period (normalised, rising 0.6 per cent), whereas gilts, despite the basket case label, see normalised yields about 3 per cent higher. Meanwhile, our fund has returned roughly 5.25 per cent (after fees). How? Why?” Roberts continued.

“Income: if we have a yield on the portfolio (or any bond) of say 4 per cent, then if capital values don’t change the total return after one year is 4 per cent,” he said. “Alpha: you can see the volatility in gilts and US Treasuries. We have been able to exploit that, together with moves in corporate bonds to add a little extra value.”

“We have been right: Old Normal prevails. Total returns have been positive despite capital values remaining largely flat. Income plus alpha has made mid-single digit, inflation beating returns for our investors. What will the next year bring? Who knows, but starting with a 4-5 per cent income from your bonds can compensate for a lot of uncertainty,” Robert said.

also recently launched a new UK Gilt Fund. The fund aims to combine the defensive characteristics of gilts with the return potential of active management, offering investors a core portfolio building block with high liquidity and transparency.