SIG’s Anthony Gillham sees UK bond yield problems ahead

With UK government bond yields hitting a 50-year low this past week, investors should watch out for unexpected changes.

The FT reports that UK 10 year government bond yields reached the lowest level in their 50 year history on Wednesday 9 November.

While George Osborne may be celebrating, fixed income investors need to take note – and not just because a 2.1% level of nominal yield offers investors scant protection against inflation.

Robert Stheeman, the head of the Debt Management Office (the organisation responsible for the UK Gilt, or government bond market), makes an important point when he cautions against complacency. While negative real yields can persist in an environment where all investors care about is a return of their capital, we have seen how quickly markets can turn when they get wind of a problem.

You might think a sharp rise in yields is very unlikely given the recently announced additional £75bn programme of Quantitative Easing, but in the months following the UK’s first QE announcement government bond yields actually rose significantly.

Factor in current weak expectations for GDP growth in the UK and one might question the ability of the UK to keep its programme of austerity on track. For fixed income investors this means remaining vigilant because current low levels of yield are anything but guaranteed.

 

Anthony Gillham is portfolio manager at Skandia Investment Group

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