Gilt corner: Weathering a stormy week for gilts


Paul Rayner, Head of Government Bonds

15 September 2017

The biggest name in town for gilts this week has been the Bank of England, who have been busy laying the groundwork for a rate hike, perhaps as early as November. Although some have flagged the Monetary Policy Committee's (MPC’s) caveats around future data being needed to support a hike, in our view the data would have to be pretty poor for them to torpedo a fairly explicit round of signalling.

With even traditionally dovish committee members stressing the need for action, the sell-off has seen gilts underperforming against almost every other major government market this week, as yields more than doubled on short dated maturities and rose over 0.30% for 10 year gilts. Even at very long dated maturities, expectations of a hike have wiped out two months of a fairly gentle summer rally.

Meanwhile, signals from cash markets suggest that many of the banks are buying into the idea of a rate hike this November, with the yield available on some one year certificates of deposit/CDs now above 0.60%, a marked rise from the mid-high 0.40% where they’d previously sitting.

Our funds were well positioned to weather these stormy market conditions, adding around 0.20% (against the market) during the week in our conventional funds and almost 50bps in absolute return government bond strategies. Off the back of this week’s events we’ve taken a number of key tactical decisions within portfolios, including reducing our cross market positions thanks to the relative strength of Japanese and Canadian bonds, while removing some of our curve flatteners and reduced the short duration bias across the funds. Ahead of the upcoming supply of 30 year index-linked gilts in November we’ve also increased our underweight in index linked gilts.

Despite the forecasted hike, we’re still expecting a yield of around 1.40% for 10 year gilts at the end of 2017, though any returns to dovish tendencies from key committee over the next six weeks could prove volatile for UK government bond markets.

 


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.