Bond rebound yields winners and losers ©Rex Features The net cash position of FTSE 100 companies has risen from 12.2bn in 2008 to £73.9bn this year Cautious investors and savers looking to retire are set to be the biggest winners from a rebound in gilt yields, driven by a brightening economic outlook. In the last days of December gilt yields rose to their highest level since July 2011, on signs of a strengthening UK economy and news that the US Federal Reserve is to wind down its own bond-buying programme, also known as quantitative easing. In recent years, the yield on UK benchmark 10-year gilts, or government bonds, has fallen to record lows due to the Bank of England's own large-scale bond-buying programme, which has driven up the price of these assets and pushed down their yield. The prospect of a continued rally in gilt yields is good news for investors who prefer safe haven assets, such as government bonds, but who have seen returns on these assets dwindle to below inflation. Savers who are coming up to retirement and plan to exchange their savings for an annuity, or move into income drawdown, are likely to benefit most, as their income is linked to gilt yields. "Those considering an annuity could well see a rise in rates as gilt yields and corporate bond rates rise," said Adrian Lowcock, senior investment manager with Hargreaves Lansdown, the independent financial advisers. Indeed, the level rate for a 65-year-old is up more than 10 per cent since this time last year so those considering buying an annuity are in a much better position than at the beginning of 2013. Rising gilt yields also increase opportunities for more cautious investors, say advisers. "Equity dividends have enjoyed a commanding lead over bond yields for some time, pushing income seekers further up the risk-spectrum to achieve a real return after inflation," said Jason Hollands, managing director of Bestinvest, the brokers. But with gilts now offering positive real yields again and investment grade bond yields also on the rise, you can expect to see more cautious investors allocate back into fixed income as the adjustment process plays out through 2014. While there is an expectation that yields will continue to rise as the Federal Reserve begins tapering, advisers cautioned there is a danger yields could fall back if economic sentiment deteriorates. "While we still have concerns about fixed interest, equities aren't cheap either and so investors have to tread very carefully," said Patrick Connolly, certified financial planner with Chase de Vere, the independent financial advisers. Asset allocation is key. For fixed interest exposure we use strategic bond funds where managers have the flexibility to avoid any potential banana skins. While rising gilt yields will create winners, those who have retained exposure to fixed interest funds are likely to have another bad year, say advisers. "The average UK gilt fund had a poor year, down 5.2 per cent as UK gilts are taking their lead from equivalent bonds in the US, where 10-year Treasuries lost 10 per cent of their value," said Brian Dennehy, managing director of Dennehy Weller, the independent financial advisers. Investors in UK gilt funds should expect more of the same in 2014, that is losing money.