UK base rates could fall below 5% for the first time in almost 30 years, according to Gerrard, while...
UK base rates could fall below 5% for the first time in almost 30 years, according to Gerrard, while US rates have yet to hit the bottom.
Recent data shows that there is still uncertainty over a recovery in the US market and, as such, the Bank of England may choose to take further insurance over the coming months, says Mike Lenhoff, chief portfolio strategist at Gerrard.
The UK equity market was boosted by the unexpected base rate cut on 2 August, which caused a corresponding fall in bond yields. Lenhoff says there has been a noticeable flattening in the gilt yield curve as yields in the five-year area fell.
He says: 'The easing in policy was particularly surprising in the light of further data released, which highlighted the strength of spending, borrowing and the property market.
'According to the latest CBI Distributive Trades survey, the balance of retailers reporting higher sales in July was the strongest since May 2000. Meanwhile, both Nationwide and the Halifax house price indices have remained firm.'
Despite this, manufacturing has slipped further into recession and this downturn is starting to spread to other areas of business services, says Lenhoff.
He explains: 'For the time being, money markets are anticipating that base rates will remain on hold until the end of the year before rising. The risk is, however, that with unemployment now in the process of turning upwards, further action may be required. Near term, the 10-year area of the market should remain firm.'
Paul Griffiths, head of fixed income at Investec Asset Management, says he is not positive on gilts at the moment because he believes the market is overestimating the weakness of economic data.
Griffiths says he is cautious on the UK as he believes consumer and housing markets will remain buoyant.
While he does believe that UK rates have now bottomed, he sees further scope for cuts in the US over the coming months.
'Fixed interest assets still look attractive and we are overweight US assets,' he says. 'Predominantly, we favour Treasuries and we have been cautious on corporate spreads. We still see some value in the eight to 10-year part of the Treasury yield curve.'
Yields on the 10-year Treasury bond have edged up in recent weeks, to little more than 5% as a result of softer news flow, but Gerrard believes the lack of any real positive news will see bonds continue to struggle. Lenhoff argues that rates in the US are likely to continue falling because at this stage signs of recovery are thin on the ground. Griffiths adds that he does not expect rates in the US to start to rise anytime before the middle of 2002.
Merrill Lynch is remaining positive on the global outlook for bonds relative to cash, although it is favouring corporate bonds over sovereign debt as the group believes economic growth looks set to recover.
The company believes the US and UK are both entering the latter stages of the easing cycle for interest rates, which should favour longer-maturity government bonds over short maturities.
• UK equities boosted by rate cut.
• 10-year gilts should remain firm.
• Consumers remain strong.
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