Royal & SunAlliance Investment Management is looking to buy into shorter-dated gilts but only after ...
Royal & SunAlliance Investment Management is looking to buy into shorter-dated gilts but only after yields have risen further.
Dave Hooker, assistant director, UK gilts at the group, says the investment house will look to buy into five-year gilts when the yield reaches 6.5%, today it stands at 6.35%. He is anticipating a sell-off in this area over market concerns about the speed of UK economic growth.
He says: "We are seeing a strong cyclical upturn in the UK which should continue this year and this is pretty much the market consensus. This means rates are going to go up further this year and we expect them to peak at around 6.5%.
"From here, our view begins to differ from the consensus. In our scenario, the UK economy will begin to slow, with consumers responding to the rises in interest rates and there will be cuts in interest rates in the first half of 2001."
The longer end of the gilt market continues to be driven by an excess of demand over supply, with 30-year gilt yields currently at around 4.65%. Demand for long-dated gilts from pension funds and life offices looking to meet the Minimum Funding Requirement (MFR) continues to be high but issuance in this part of the curve is still relatively low, with the public finances in good shape and the Government not needing to borrow as much long-term money as in the recent past.
A government sponsored committee of actuaries looking at alternatives to gilts for funding the MFR is meant to report in the spring, with Royal & SunAlliance expecting it to recommend that corporate bonds down to a rating of AA be included as well as gilts. Hooker says that this would lead to the demand currently focused on long gilts shifting more to corporate bonds, and he is looking to move out of long-dated gilts into corporate bonds to take advantage of this trend.
Peter Price, head of fixed interest at Hill Samuel Asset Management, believes that the low inflation environment will continue and the current rises in interest rates by the Bank of England are arguably not necessary. Earlier this month, the Bank of England raised rates by a quarter point to 5.75% from 5.5%.
Price says: "We believe that inflation is not going to cause a problem. Price competition and the internet are going to keep pricing down and the strength of consumer confidence is to a large extent related to the cheapness of goods. We have had a year where goods prices have fallen in the shops.
"Inflation could go below 2% over the next two months and there is a reasonable possibility that you will see the retail price index falling below the Government's target of 1.5% in the next year or so. I think the Monetary Policy Committee of the Bank of England believes that inflation will go above 2.5% on a two-year view. On these grounds, I think a further quarter point rise in February or March is pretty likely."
Hill Samuel is favouring 11-year gilts which the group believes offers a reasonable yield of 5.70%. It also favours nine-year gilts over 10-year gilts, again on a yield argument. Nine-year UK government bonds are yielding around 6% while the 10-year benchmark gilt is yielding around 5.75%.
Further signs that inflationary pressures may be beginning to build up in the UK economy came last week with figures from the Office for National Statistics (ONS) on unemployment and earnings. The UK unemployment rate fell to 4% in December 1999, the lowest rate in almost 20 years, according to the ONS. The ONS also reported that annualised wage growth stayed at 4.9% in the three months to the end of November last year. Both sets of figures are likely to increase the potential for more interest rate rises from the Bank of England.
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