Chris Bowie has taken a zero weighting to gilts in his £247.5m Ignis Corporate Bond fund, while Peter Geikie-Cobb and Paul Thursby have taken a short position on the bonds in their £104.2m Thames River Global Credit fund.

Last year, the Ignis Corporate Bond fund held an 8% allocation to gilts, which Bowie says was “as defensive as we could be”, given the portfolio’s 10% limit.

“This time last year there was a lot of debate about bonds being in a bubble, and we thought they were certainly stretched but not in a bubble,” the manager says. “Now we’re starting to think that they’re getting close to being in a bubble.”

Bowie used the proceeds from the disposal to buy into new debt issues from companies such as Northumbrian Water and added to covered bond holdings from groups such as Sainsbury’s, Tesco and BT.

“Longer-term – in just over a year I’m really worried that government bonds will sell off.

“What will drive that will be the threat of future inflation,” Bowie says.

The manager expects inflation to stay above the Bank of England’s 2% target - despite the Bank’s forecast that it will fall below this level - and to rise throughout 2013. He plans to reduce the fund’s duration during 2012 in anticipation of this.

Meanwhile, the fund has added to its overall short duration by selling the UK gilt market short via long gilt futures. The one-year short in gilts has taken the fund’s position to three years short.

“UK gilts have reached extreme valuation levels both in nominal and real yield terms,” the fund’s managers say. “UK growth will remain anaemic, giving little hope of any significant improvement in the deficit in the near future, and inflation remains stubbornly high.”

Figures from Lipper show gilt funds were the best-performing portfolios of 2011. The IMA UK Index Linked Gilts sector returned an average of 21.9% last year, while the IMA UK Gilt delivered 15.8%.

In comparison, the IMA £ Corporate Bond sector, the third-best performer, returned an average of 5.1%.

“There has been concern over the relative high price of GILTS since 2010 and they continue to defy logic however when (not if) they fall in value it is going to be painful”. – according to Tony Slimmings of WR Financial Management.