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Fidelity bullish on gilts

Today’s decision by the Bank of England to halt the fiscal stimulus will not adversely affect the gilt market, according to Fidelity.

A cessation of the £200bn quantitative easing programme has led some experts to fear that the UK debt overhang will turn investors off gilts but Fidelity strategic bond fund manager Ian Spreadbury says the fears are overstated.

Charles Stanley chief economist Edward Menashy says the end of quantitative easing should be followed by definitive plans to reduce public debt or risk a hike in gilt yields.

Menashy says: “Surely it would be better to come out now with firm plans rather than to invite a sterling crisis that could result in higher bond yields and consequently blot out the fiscal stimulus that the Government is desperately trying to preserve?”

But Spreadbury says: “While we may initially see some indigestion in the gilt market following today’s decision to pause quantitative easing, there is still enough capacity in the private sector for future government bond issues.”

Spreadbury argues that there are a lot of cash solvent investors particularly in Asia that could still be interested in UK government bonds. He also predicts that banks are likely to be big buyers of gilts going forward as a result of higher liquidity requirements.

He says: “While further inflation rises could cause the Monetary Policy Committee to look at rates, any increase would make the cost of servicing the UK’s high debt levels more expensive and potentially place an economic recovery in jeopardy.”

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