The new so-called 'currency vigilantes' hit sterling hard yesterday, on a day when gilt yields dropped to a new record low.
M&G says currency vigilantes have taken the place of traditional bond vigilantes in enforcing market discipline.
The pound fell sharply against the dollar and euro yesterday, with sterling now at a six month low against the European single currency. M&G highlights the pound is now the worst performing currency in 2010, having fallen 2.5% against the dollar.
Gilt prices continue to soar however, with the five-year gilt hitting an all time record low yield of 1.44% yesterday morning. The five-year gilt now yields 0.2% lower than the equivalent bund.
"This is staggering if you consider that eurozone CPI is 1.8% vs UK CPI at 3.1% - and UK inflation is likely to remain elevated for another 15 months or so as VAT hikes work through the year on year numbers," M&G bond manager Mike Riddell says.
"Also, German bunds have had a massive safe haven bid this year on the back of the European peripheral meltdown."
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