“From a macro perspective, there is not much left in terms of Gilt yield declines. But more importantly, watching the Gilt market is potentially like watching a slow train crash.” says Bryn.
“The asset class is under pressure from the eventual reversal of quantitative easing; deteriorating fiscal positions; the whim of credit agencies, and a possible Sterling crisis, all causing yields to rise and pushing up borrowing costs. We think the only way to stem this impact is for the Bank of England to force commercial banks to buy Gilts.”
Bryn also believes that inflation is likely to make a more rapid comeback than consensus suggests.
“The Bank of Israel (August) and now the Reserve Bank of Australia has raised rates. The US Federal Reserve has hinted it will start to reverse its ultra-easy stance once the economy recovers, and the Bank of Korea is also talking tough on inflation. So there is a worry that inflationary pressures are quietly building whilst the market continues to see deflation is the bigger risk.
“We are, therefore, nervous of short-dated positions and prefer to have cash on the sidelines for when there is a rise in yields. Long-dated financials and corporate bond yields can, however, offer some carry and protection from volatility in underlying Gilt yields.”
For further details please contact David Holloway, Head of Marketing at Rathbone Unit Trust Management (020 7399 0189).
The information contained in this note is for use by journalists and must not be circulated to private clients or to the general public. The opinions expressed here represent the views of the fund manager at the time of preparation and should not be interpreted as investment advice.
Rathbone Unit Trust Management Limited is authorised and regulated by the Financial Services Authority and a member of the IMA. A member of the Rathbone Group. Registered office: 159 New Bond Street, London W1S 2UD. Registered in England No. 2376568.