London: It’s time to turn bearish on UK government bonds, according to BlueBay Asset Management LLP.
Gilts are “extremely overvalued,” according to Mark Dowding, a London-based money manager at BlueBay, which oversees about $55 billion (Dh202 billion). He forecasts that 10-year yields will climb to the highest level in 18 months amid rising inflationary pressures and that the UK government will scrap its austerity policies and opt instead for fiscal easing as it copes with the fallout from Britain’s decision to leave the European Union.
Benchmark 10-year gilt yields dropped to a record-low 0.501 per cent in August as investors sought the safest assets following the Brexit vote. The yield has averaged 1.08 per cent over the past 12 months, and stayed below 1 per cent for only four months in Bloomberg data going back to 1989, a sign that it may be set to break higher.
“Gilts seem extremely overvalued,” Dowding said. “Ten-year gilt yields at 1 per cent is an extreme valuation and it’s going to be very difficult for gilt yields to go down. We are heavily underweight in gilts and continue to sell gilts on any strength because we believe that it’s not credible to think that UK yields can fall much further.”
Ten-year gilts yielded 1.04 per cent as of 9:43am on Monday in London. Dowding forecasts the yield will climb to 2 per cent in the next 12 months, a level not seen since December 2015. His prediction compares with a weighted-average forecast of 1.72 per cent by the second quarter of next year in a Bloomberg survey of economists.
Uncertainty could ease this week, should Prime Minister Theresa May’s minority government successfully pass their agenda for the next two years, allaying the chance of an imminent government collapse. Support for gilts has come from the decision to leave the EU, with concerns only heightened following this month’s election, which left May without a majority in the parliament’s lower house.
Government support
She is expected to garner enough support for her program thanks to help from the Northern Irish Democratic Unionist Party, which will mean the chances of an election re-run would be postponed, for the time being at least. A successful vote will likely precipitate a rise in yields, said Richard Kelly, head of global strategy at Toronto-Dominion Bank in London.
“We don’t have concerns,” Kelly said. “Yields could probably drift higher once the Queen’s Speech passes given unfounded concern it might not make it.”
Two-year gilt yields jumped last week to 0.26 per cent, the highest since November, after Bank of England chief economist Andy Haldane said he considered voting to increase interest rates this month. Markets are pricing in a more-than 50 per cent chance of a rate hike this year, with Nomura International Plc predicting that officials will act as early as their next policy meeting, which concludes on August 3.
“At this point, the way to position in the UK is to have a more structurally negative view on UK assets rather than on any specific event around the vote next week,” BlueBay’s Dowding said in an interview on June 23.
— Bloomberg
