So it finally happened. The 24-year bull run in the Gilts market has come to an end, or that is the view of some investors and strategists as the UK economy looks set to grow and fears turn to rate rises rather than austerity and triple dip recessions.
A consensus of strategists and investors are forecasting UK government bonds will sell off this year as increasingly upbeat economic forecasts make Gilts less appealing while deflation worries in the eurozone prompt switching into German Bunds.
Benchmark 10-year bond yields, which have an inverse relationship with prices, are trading at 2.82 per cent, a sharp rise since 300-year lows of 1.43 per cent were recorded in August 2012.
This doubling of yields since the summer of 2012 has prompted the decisive conclusion from some that the Gilts bull run, which dates back to the early 1990s, has run its course.
Anthony O'Brien, a strategist at Morgan Stanley, says: "The consensus this year is for the Gilts market to sell off. It is a sharp turnround since May last year when there were worries about a triple dip recession."
A Gilts trader at a European investment bank says: "We are positioning for the end of the bull market in Gilts. Yields have been rising gradually since the summer of 2012, but in the past six months yields have accelerated much higher."
He adds that although Gilt prices have rallied slightly since the start of the year, it is a temporary correction and he remains bullish.
Mr O'Brien adds that forecasts of a sell off in Gilts are backed up by predictions of steady UK economic growth by the International Monetary Fund, the Bank of England and the Office for Budget Responsibility, the UK's fiscal watchdog.
Although yields are still relatively low in historical terms and unlikely to reach levels of more than 12 per cent when the bull run is considered by some to have started in April 1990, investors and strategists say the market is at a significant turning point.
With three successive quarters of growth, expectations have turned to when the Bank of England will raise rates rather than cut.
The unemployment rate has been an important factor behind rising expectations of an increase in interest rates. It has fallen sharply since Mark Carney, the Bank of England governor, signalled it would be a key indicator in setting borrowing costs.
But it is not just the growing confidence in the UK economy that has caused the bearishness in Gilts.
As expectations have increased that the next move in UK monetary policy will be a tightening, the reverse has happened on the continent with the European Central Bankexpected to ease.
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FOLLOW USΑκολουθήστε τη σελίδα του Euro2day.gr στο LinkedinIndeed, concerns over deflation have heightened in the eurozone, making Gilts less attractive compared with the main markets on the continent. For example, the extra cost to borrow Gilts over German Bunds has doubled since May last year.
Some investors are also switching out of Gilts into peripheral government bonds, such as Spain and Ireland.
Another factor undermining Gilts is a more sanguine view of the eurozone. Worries that monetary union might implode no longer dog markets, arresting the haven trade into Gilts.
This optimism over the eurozone, which coincided with the ECB's pledge to do everything in its power to prevent a break-up in the single currency, also sparked a so-called Great Rotation out of bonds into equities.
Although some say the Great Rotation was more about switching out of cash or money market funds, which act as proxies for cash, into equities, there was certainly some selling of bonds, such as Gilts, too.
Bearishness is not helped by redemptions of Gilts, bought under quantitative easing, due in March. If the economy is improving, the Bank of England might decide to reduce its £375bn portfolio of Gilts rather than reinvest, putting further upward pressure on yields.
However, Gilts investors should not panic. The bull run may be over, but yields are likely to rise gradually, with consensus forecasts suggesting 10-year yields will increase to between 3.5 per cent and 4 per cent by the end of the year.
John Stopford, head of fixed income at Investec Asset Management, says: "The Gilts market is not about to collapse. It is not a time to panic. There are investors, such as pension funds, that will always want Gilts."
The Gilts party may be over, but there will not be a raging hangover, he adds. It will be more like a minor headache.
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