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Bank reveals downgrade concerns

The Bank of England has revealed that investors in gilts are concerned over the future of the UK’s ability to repay on debt obligations.

In its latest quarterly review, the Bank revealed that over the last quarter investors have been concerned about the debt position of the UK, coupled with the need for considerable gilt sales in 2010.

This concern has led to an increase in gilt yields over the period – Thursday saw one of the year’s biggest sell-offs, with 10-year gilts up more than 10bps.

The Bank says: “Contacts noted that gilt yields were affected by concerns about how the gilt market would absorb the scale of prospective issuance by the UK Debt Management Office and/or potential gilt sales by the Bank.

“Similarly, because of the projected UK government debt position, investors might also have become more concerned about the United Kingdom’s credit standing and demanded additional compensation to hold gilts.”

Report in the nationel press last week said former Home Secretary David Blunkett hit out at Treasury sources who have leaked their concerns about the failure to tackle the debt mountain. He said they “should be ashamed” for raising concerns that could put Britain’s credit rating at risk.

Ignis economist Stuart Thomson says the AAA rating of the UK should be safe, for now: “In the Animal Farm world of sovereign credit ratings, all ratings are relative and some are more equal than others. Rating agencies have grouped the UK and US together as the leading financial centres and as such the pain threshold for downgrades is considerably higher than other countries.”

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