After a rally in 10-year gilts there are now a number of managers looking to take profits. Yields ha...
After a rally in 10-year gilts there are now a number of managers looking to take profits.
Yields have fallen to around 5.3% from 5.85% in mid-January and Joe McKenna, fixed interest investment manager at Britannic Asset Management is looking to switch into three year gilts, now yielding 6.32% and 15 year gilts which are yielding 4.93%. McKenna says: "UK gilts are very expensive compared to European issues such as German bunds but there is some justification for this There is not that much supply in the UK gilt market and on average UK inflation is 1% plus below European levels.
"UK economic growth is strong and we believe short term interest rates are going to go up by 0.5% or so from here and we are looking at a peak level of 6.25% or 6.5% for UK interest rates by the end of the year.
"The one thing that is continuing to hold up is that the inflation picture is still very good and we do not believe that is going to change."
The strength of the UK economy is shown by wage figures from the Office for National Statistics published last week.
British incomes rose 5.9% faster over the three months to January 2000 than over the same three-month period a year earlier - the fastest rise in more than seven years. The unemployment rate in February also held its 20 year low of 4%.
McKenna adds that a dominant influence over the gilt market will be sentiment in the US bond market.
He believes that the economy needs to slow for bond investors to become more positive about the US market and this will then permeate into other world bond markets including the UK.
Alex Jones, director of long dated bonds at Royal & SunAlliance Investment Management is also looking to trim back her position in the 10 year area of the gilt market and move into 15 year and 30 year gilts as well as cash. The yield on 30 year gilts is 4.41%.
Jones adds that concerns about the strength of the UK economy and the booming property market are now less of a factor compared with the beginning of the year. She says: "The UK economy has been running along quite well although the gilt market got quite pessimistic earlier in the year about how much and how quickly interest rate increases might come through but since January we have had a recovery in the gilt market.
"The Budget is also an important factor for the market and we would expect the Chancellor to give away about £2bn in this week's Budget. That would not be a shock and we do not expect the gilt market to move greatly."
For Royal & SunAlliance the main factor to focus on during the second quarter is domestic interest rates and it expects them to rise from 6% to 6.5%.
Jones adds: "We are expecting the US Federal Reserve to raise interest rates again at their next meeting and we believe the Monetary Policy Committee of the Bank of England will have to move again."
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