Gilt fears may be wrong, says City Financial

28 January 2010 | By Lee Jones

This week the Bank of England ceased its £200bn quantitative easing programme but the debate rages as to the effect of the stimulus with the Office of National Statistics data revealing the UK barely crawled out of the recession at the end of 2009.

These disappointing results coupled with expected stringent fiscal tightening have led many predicting an exodus of bond investors from UK sovereigns.

Pimco managing director Bill Gross recently said that “gilts are resting on a bed of nitro-glycerine” thanks to massive public debts.

But City Financial Strategic Gilt Fund manager Ian Williams says: “Universal sentiment in markets is very often wrong. Whilst many investors are underweight in gilts, we believe there is a plausible case for owning this asset class in 2010.”

Williams argues that in March 2009 when quantitative easing began most predicted a bull run on the gilt market, which did not happen. He says: “Rather than a surge in gilts, 2009 was characterised by a long and sustained rally in the equities markets. While this may have been simply coincidental to quantitative easing, it suggests that we should consider the possibility that a withdrawal of quantitative easing will have an equal, but opposite, effect.

“We could therefore see a retrenchment in equities and a much more stable gilt market than is currently built into most forecasts.”

Williams says the economy’s muted reaction to the stimulus may force the Bank to increase easing after next month or enforce negative central bank interest rates.

“These measures could help to offset fiscal tightening so investors will need to weigh these factors to achieve the proper balance between equities and fixed interest within their portfolios.”