Investec Guinness Flight is favouring shorter dated UK gilts amid confidence yields will fall signif...
Investec Guinness Flight is favouring shorter dated UK gilts amid confidence yields will fall significantly by the end of the year.
The group forecasts three year gilt yields will fall by 100 basis points to 5.15% by the end of 2000 in anticipation of a fall in UK interest rates.
It also expects a 50 basis point fall in the yields on 10 year gilts to 4.76% from 5.26% over the same time period.
Investec Guinness Flight is overweight in the three to 10 year area of the curve in a bid to take advantage of these potential falls in yield.
Eddie Middleton, investment manager, fixed interest at Britannic Asset Management, is also overweight in gilts up to the 10 year area of the yield curve.
He points out the recent Government auction for mobile phone licences has raised around £22.5bn, which it will use to buy back debt.
Middleton anticipates buybacks to be focused at the shorter end of the gilt market where he expects yields to fall.
Paul Brain, head of retail fixed income at Investec Guinness Flight, says: "We expect one more rate rise this year and then the market will start anticipating rate cuts.
"The outlook for gilts is good and at the short end there is a lot of room for yields to fall. The technical background is also supportive.
"There has been a rally at the long end of the market with pension funds buying into long-dated gilts to meet the Minimum Funding Requirement (MFR). The Government is also trying to increase issuance at the long end.
"Competing asset classes such as corporate bonds have also been underperforming and gilts are being seen as a safe haven in the current environment.
"We believe a new regime for the MFR will allow diversification away from gilts and into supranational debt from bodies such as the European Investment Bank and World Bank."
Middleton says the favourable technical factors in the gilt market are also supported by the economic outlook. He adds: "We feel the UK economic environment is reasonably supportive for gilts. Inflation is well below the Government target of 2.5%.
"We have quite intense competition on the high street and the inflationary impact from oil price rises is starting to wane. The strength of sterling has been a depressive factor on inflation as well so the inflation outlook is quite benign.
"The concerns for the Monetary Policy Committee of the Bank of England are earnings and house prices although it has been indicating recently that house prices are moving down its list of priorities."
Middleton believes the UK is close to its peak in interest rates and expects them to go up to 6.25% over the coming months from the current level of 6%.
He adds: "The international environment is less positive for gilts as we have seen strong inflation numbers out of the US and we expect a 50 basis point interest rate rise at the next meeting.
"In Europe interest rates are also set to rise but the domestic picture is positive as the UK is still the closest to a peak."
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