Gilt corner: The calm after the storm


Craig Inches, Head of Short Rates and Cash

22 September 2017

The tone in gilt markets has been fairly muted over the week, with yields marginally higher after the carnage of last week. The final asset purchase facility saw 10 year bonds sold to the bank below market price and as a consequence 30 year gilts performed well on the curve as a number of market participants switched 20 and 50 year maturities back in to 30 year bonds. A number of forecasters believe the Monetary Policy Committee (MPC) have rubber stamped the November rate hike barring nuclear war, but the consensus is much more mixed on whether this will be one and done, or the precursor to more hikes next year. The market always likes to test the extremes and as a result the yield curve is flatter led by an underperformance of five year maturities. Elsewhere, for the first time in over five years, pension funds became net sellers of index-linked gilts, another factor adding to the massive volatility in index linked bonds. This feast or famine approach by investors leads to wild price swings on a weekly basis.

In other news, the lower than expected deficit numbers released this week should offer the Chancellor a little more wiggle room in his budget than previously thought, although whether he chooses to deploy this remains to be seen. While most of the UK’s legislative focus will be on the next steps in the Brexit negotiations as Theresa May’s Florentine speech set sterling wobbling but few pulses racing, the content of the forthcoming autumn budget and the latest borrowing forecasts are likely to offer far more substance for  gilt investors.

In our funds, the continuing underperformance of gilts against a range of other geographies meant we took profits as we closed out our positions in Bunds and Japanese government bonds, while slimming down our cross market holding in Canadian bonds. Elsewhere we’ve been reducing some of our curve flattening exposure, taking advantage of the continued outperformance in long dated gilts due to the limited supply in this area. Global economic momentum continues to look fairly strong, as well as a hawkish tone from central bankers. Leading us to expect the gradual rise in yields to continue. Our core strategy continues to emphasise a short duration stance and taking advantage of attractive cross market opportunities where appropriate. 

 

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.