Gilt corner: supersized American debt supply & mini-me gilt purchases


Craig Inches, Head of Short Rates and Cash 

26 February 2018

Conditions for gilts were slightly rosier last week, the market rallied a little across the curve, although most uncertainty remains at the short end ahead of a potential rate rise in May. 
This strength has come in anticipation of the Bank of England reinvesting the proceeds of a bond, bought as part of its quantitative easing efforts, which is maturing this year. 
The asset purchase facility has around £15 billion to spend across short, medium and long-dated assets over a five-week time frame, so the Bank looks set to be a major buyer over the coming weeks, meaning that this strength is likely to hold.
Gilts not only strengthened, but outperformed their overseas counterparts, partly thanks to the weakness in US Treasuries, where yields rose over the week as the country printed $78 billion of short-dated bonds.  
While their government bond market is much larger than its UK counterpart this was still a supersized level of issuance, the second largest amount ever printed over three days in the US, and so this influx of new supply pushed yields higher.
As a result of these conditions, we’ve been selling some UK holdings after this recent rally and purchasing overseas bonds, including adding to our holding in long-dated US Treasuries as they’ve cheapened up relative to gilts.

Conditions for gilts were slightly rosier last week, the market rallied a little across the curve, although most uncertainty remains at the short end ahead of a potential rate rise in May. 

This strength has come in anticipation of the Bank of England reinvesting the proceeds of a bond, bought as part of its quantitative easing efforts, which is maturing this year. 

The asset purchase facility has around £15 billion to spend across short, medium and long-dated assets over a five-week time frame, so the Bank looks set to be a major buyer over the coming weeks, meaning that this strength is likely to hold.

Gilts not only strengthened, but outperformed their overseas counterparts, partly thanks to the weakness in US Treasuries, where yields rose over the week as the country printed $78 billion of short-dated bonds.  

While their government bond market is much larger than its UK counterpart this was still a supersized level of issuance, the second largest amount ever printed over three days in the US, and so this influx of new supply pushed yields higher.

As a result of these conditions, we’ve been selling some UK holdings after this recent rally and purchasing overseas bonds, including adding to our holding in long-dated US Treasuries as they’ve cheapened up relative to gilts.

Past performance is no guide to the future. 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.