Investors who sought safety in government bonds earlier this year have already seen impressive returns as demand has pushed prices sharply higher in recent months.

Five-year gilts have returned around 8 per cent since the start of July, while longer-term bonds have generated a profit of 21 per cent, according to Killik & Co, the advisory firm.

Gilt prices have risen fast as investors have switched from equities to more secure assets to escape falling stock markets.

At the end of 2007 and the beginning of this year, yields on gilts were as high as 5 per cent, reflecting the view that interest rates would rise to combat inflation.

But the flight to quality, and the fact that yields looked increasingly attractive as expectations for interest rates started to fall, has increased demand for gilts. This has driven prices up and in turn squeezed yields.

Advisers are now warning that investors who have not already moved into gilts may have missed the best opportunity. “The gilt market has been more volatile of late,” says Mick Gilligan, head of research at Killik & Co.

“People have taken money out of the market to buy short-dated gilts, believing it is less likely that the UK government will default on debt.”

The sharp falls in equity values in October accelerated the move into gilts and pushed yields down further still. Two weeks ago, the yields on 10-year gilts were 3.85 per cent, according to Killik. Yields then fell quickly as the market geared up for another interest rate cut and they bottomed out last week at around 3.35 per cent.

“If you think that in late July, 10-year gilt yields were at 5 per cent, that is a huge move,” says Gilligan. “I think anyone looking at bonds now will have missed a move of that magnitude.”

Killik & Co believes many investors have been opting for short-term gilts to keep their funds liquid. Also, longer-term bonds are more sensitive to changes in interest rate expectations, which can affect the capital value of the bond. “Investors will now get less than 2 per cent for parking their money for two years,” says Gilligan.

Gilt rates tend to move in line with the Bank of England interest rate. The base rate has fallen from 5 per cent in September to 2 per cent this month.

So yields on two-year gilts have fallen fast in recent weeks. From around 2.2 per cent last month, they slid as low as 1.6 per cent last week, before recovering to around 1.9 per cent, as demand eased following the one percentage point base rate cut.

However, while a yield below 2 per cent does not look particularly enticing, Gilligan believes that with redundancies rising and the economy deteriorating, further interest rate cuts could be made, which could prompt more falls in gilt yields.

Investors who want some element of safety without sacrificing too much in the way of returns, could look to corporate bonds. The yields on these bonds are at an unusually high premium over gilts. On average, investment-grade corporate bonds are providing an additional 3.5 per cent over the equivalent length gilt.

“As interest rates have fallen, yields on gilts are relatively low and cash is not providing much return either,” says Adrian Lowcock, senior investment adviser at Bestinvest.

“For those looking for positive returns, while taking some risk out of the equation, some corporate bonds look relatively attractive.”

Corporate debt is pricing in severe default in the coming years. Lowcock points out that current pricing levels signal an expectation that defaults could become worse than during the Great Depression.

“The only reason investors could suffer is if default rates are worse than those priced in – which means the worst economic downturn in the last century,” he says.

Some corporate bond funds are offering yields of 7 per cent or more. These funds, which offer diversified exposure to different types of debt, can be a good way to access this asset class, particularly in the current environment where it is uncertain which companies are at risk of defaulting.

The Royal London Corporate Bond Trust and the Invesco Perpetual Corporate fund, for example, have yields of 7.7 per cent net of fees. Both have around 30 per cent in financial debt. Bestinvest says the Royal London bond is riskier as it holds around 18 per cent in unrated debt. A more cautious fund is the Legal & General fixed-interest fund, which has 11 per cent in gilts as well as 30 per cent in financials. This has a yield of 6.8 per cent net fees.

Fidelity Moneybuilder Income, which has about 20 per cent in gilts, is more cautious on when the prospects for corporate bonds will be played out, according to Bestinvest. This fund has a net yield of 5.8 per cent.

“Gilts are probably done; it is not time to chase the gilt market,” says Lowcock. “Investors need to move on and find the next opportunity, which could be corporate bonds.”