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Short-dated bonds take a hit

The base rate rise last week resulted in a heavy sell-off of Government bonds.

Short-dated bonds reacted particularly badly to the news, with longer-dated issues holding up better.

Many bond managers expected a rise at some point in 2007, with managers including M&G fixed-interest specialist Richard Woolnough positioning their funds in anticipation.

The early increase has left managers unsure as to which direction rates will take next.

Hargreaves Lansdown head of research Mark Dampier says: “It was a good decision to lift interest rates early as it keeps everyone on their guard. Equities are bound to have a more bumpy year but their strong returns should see them continue to do well.

“The picture for bonds is not so rosy as attempts continue to cull inflationary pressure with further rises of 0.25 to 0.5 per cent dependent on inflation data due out soon.”

Threadneedle head of Government bonds Quentin Fitzsimmons says: “We had acknowledged the risks of further tightening early in 2007 but believe that lower rates before the end of the year remain plausible.”

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